Q1 2023 Canadian Imperial Bank of Commerce Earnings Call
Yeah.
Please standby your meeting is about to begin.
Good morning, and welcome to the CIBC quarterly financial results call. Please be advised that this call is being recorded I would like to turn the meeting over to Geoff Weiss.
Senior Vice President Investor Relations. Please go ahead, Jeff.
Thank you and good morning, everyone.
We will begin this morning's presentation with opening remarks from Victor noted our press.
It Didnt Chief Executive Officer, followed by rods promotion, our Chief Financial Officer.
Our chief risk officer.
Also on the call today are our group heads, including Shawn Beber U S region, Harry Culham capital markets in direct financial services, and John had Pallas Canadian banking.
Let's take questions following the prepared remarks.
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'll now turn the call over to Victor.
Thank you, Jeff and good morning, everyone on today's call I'll provide an overview of our first quarter results as well as an update on our strategy for successfully navigating the current economic environment with a clear path forward toward achieving our 2025 objectives and targets that we laid out at our Investor day last year before.
We get to the results, let me begin with the senior leadership change, we announced last month.
Following a 14 year career with CIBC Laura.
She was retired from our bank and we wish her well as she takes on and your new challenges.
Don and Telus has been appointed group head Canadian banking with expanded responsibility of leading CIBC is personal and business Bank. In addition to commercial banking and wealth management in Canada.
John is a proven leader he has had a positive impact in every business. He's let at CIBC is focus on execution on talent and our clients will serve us well to build on the progress we've made in our Canadian retail business.
Now turning over to our first quarter results of 2023 amidst continued central bank tightening and geopolitical tension that we had a good start to the year.
Growing revenue and growing.
Pre provision pretax earnings to record levels.
Adjusted net earnings were $1 $8 billion or $1 94 per share.
Our capital position remains strong with a C. T. One ratio of 11, 6% comfortably above the regulatory minimum and a return on equity improved to 15, 5% for the quarter.
This performance was supported by volume growth across all of our businesses and underscores the ongoing successful execution of our client focused strategy, our diversified portfolio and contributions from our organic investments over the past few years.
Our expenses declined sequentially and as we indicated last quarter with many of our key strategic investments completed or in flight, we expect expense growth to continue to moderate.
Through the fiscal year this should contribute to positive operating leverage as we realize the embedded revenue growth opportunities from our past investments.
Looking at our Canadian consumer franchise, we delivered funds managed growth of 9% almost matching last year's robust.
A 10%.
Deposit growth outpace loans for the first time in seven quarters, reflecting the shift in market sentiment given the higher interest rate environment.
Our credit card portfolios continue to perform well.
Above and beyond the Costco co brand acquisition that closed in March 2022, New account openings were up and were over 30% higher than the.
Same period last year.
This reflects our ongoing efforts to meet our clients' needs through new credit card product and enhanced client experience and expanded reward offerings.
More broadly over the past 12 months, we've driven strong client acquisition totaling over a half a million new net new clients to CIBC.
Our focused efforts to attract clients.
By leveraging the structural advantages we have built in this space will enable us to further scale our retail business in the years ahead.
In our North American commercial banking and wealth management businesses loans continued to see double digit growth while deposits were in the low single digits in both regions.
<unk> continue to be cautiously optimistic about their businesses and in light of the tougher operating environment, they're looking to strengthen their financial position through tighter working capital and through disciplined expense management.
While our pipelines remain stable, we've seen slower lending growth due to both reduced client demand and from a prudent risk posture in this environment.
Our capital markets franchise continues to deliver strong results driven by robust client activity in global markets as well as strong topline growth in our direct financial services or DFS platform.
As well, we continue to play a leadership role in energy transition.
New project media recently ranked CIBC, the third largest lender to use renewable energy projects in 2022.
At CIBC, we have a long standing focus on ESG is part of our commitment to create enduring value for our stakeholders.
This quarter, our efforts continue to be recognized and validated by prominent third party organizations first CIBC was named to the Dow Jones Sustainability Index North America for the 18th consecutive year.
Second we were included in Bloomberg's gender equality index for the eighth consecutive year.
And third CIBC was named by immediate Corpus Canada's top 100 employers for the 11th consecutive year, all recognitions that we're extremely extremely proud of.
Sustainability continues to be an essential component of our strategy and we remain focused on ESG matters of importance to CIBC.
And to our stakeholders.
We're monitoring the global economy, and what pockets of strength exist, there growing uncertainties, driven by geopolitical tensions and persistent inflationary and interest rate pressures.
This will have an impact on economic growth and on client activity in the near term.
As the landscape evolves, we remain steadfast in our focus on our clients and our long term strategy of growing our relationships with the high growth high touch segments that we're focused on advancing our digitization efforts and investing in future growth are differentiators.
All while staying agile and adapting as needed to the economic environment.
We will leverage the investments we've made in recent years to support organic growth, while taking a prudent and proactive approach to expense and risk management.
So a couple of examples in our retail business our investments in a comprehensive suite of services and tools tailored towards the mass affluent market, which includes CIBC gold planner had been successful in deepening client relationships to date, just under half of our Imperial service households has completed the CIBC go planar process.
And it's resulted in significantly higher growth in funds managed and favorable net promoter scores.
We also continue to benefit from the investments we've made in recent years in our Digitization strategy.
Incorporating AI automation and.
Cloud to further increase connectivity across our businesses. Another example, the integration of online and mobile banking applications to the cloud has vastly improved our efficiency and software releases going from two per month to multiple per week.
In addition, cloud automation or will reduce costs going forward improve resilience and enables faster change implementation to better serve our clients.
We also continue to invest in our future growth, our differentiators, including our direct financial services platform, which has delivered three year revenue CAGR of approximately 15% with revenues over $1 billion for the last 12 months.
We built a differentiated platform and our client first culture that has allowed us to develop and deliver innovative products and services that enhance the client experience grow our client base.
To improve efficiency and drive stakeholder returns.
We expect these benefits to continue to crude into the future. The net net is our investments are paying off and the businesses that we're investing in and you should see this going forward and with that I'd like to pass the call over to Raj for an update on our financials.
Thanks, Victor and thank you all for joining us This Friday morning.
Our team delivered solid results for the first quarter of 2023 supported by strong execution against our client focused strategy and disciplined resource management, we maintained our revenue momentum credit performance and balance sheet strength, while expanding margins and stabilizing expenses diluted earnings per share were <unk> 30.
Nine cents, including items of note most significantly an increase in legal provision related to the previously disclosed cerberus ruling and an income tax charge stemming from the enactment of the 2022 Canadian federal budget.
Excluding items of note, we generated strong sequential growth and profitability with adjusted EPS of $1 94, and ROE of 15, 5%.
Our balance sheet remained resilient despite the headwinds we absorbed this quarter as evidenced by a CET one ratio of 11, 6% an LCR of 134%.
The balance of my presentation will refer to adjusted results, which exclude items of note starting with slide eight.
Adjusted net income of $1 8 billion for the quarter was down 3% from the prior year, driven primarily by a credit provision against performing loans this quarter compared to a release last year.
Frank will cover credit provisions in further detail later in our presentation.
Record revenues of $5 9 billion and pre provision pretax earnings of $2 7 billion were up 8% and 6% respectively from a year ago benefiting from balance sheet growth across our business higher interest rates and strong trading activity.
<unk> were up 9% from the prior year, but down 1% on a sequential basis as we continue to focus on balance between investment and efficiency improvement.
Slide nine highlights the drivers of net interest income.
NII of $3 2 billion was up 2% from the prior year impacted by the movement of trading revenues from interest income to other income due to rising interest rates.
Excluding trading NII was up 13% from the prior year as a result of continued loan and deposit growth across our business as well as improving margins. Excluding trading total bank NIM was up five basis points sequentially and three basis points over the prior year benefiting from higher margins in several segments as well as interest income from Corp.
And treasury activities.
Canadian P&C NIM of 248 basis point has improved steadily over the last year up 12 basis points from the same quarter in 2022.
Sequentially. It was up one basis point as deposit margin expansion due to higher rates more than offset pressure on asset margins, particularly mortgages.
Margins also continued to improve and our U S segment NIM of 354 basis points. This quarter was up nine basis points from the prior year and five basis points sequentially, primarily due to the net impact of asset yields and deposit pricing resetting higher to reflect recent interest rate hikes, we anticipate continued growth in non trade.
Adding interest income supported by higher funds managed as well as margin expansion, assuming the forward rate expectations and the current yield curve.
Turning to slide 10, noninterest income of $2 7 billion was up 15% from the prior year supported by growth in trading income, which was particularly strong this quarter and expect it to moderate excluding.
Excluding trading market related fees recovered, 10% sequentially, but were down 4% over the prior year, largely due to investment banking and wealth management fees, which were impacted by lower client activity and market depreciation.
Transaction related fees were up 4% sequentially and 2% from the prior year, driven most notably by strong foreign exchange income from client activities this quarter.
Turning to slide 11 expenses went down 1% sequentially or substantially comparable excluding the impact of higher severance incurred last quarter compared to the prior year expenses were up 9% largely due to strategic investments made throughout 2022 as well as the impact of inflation in that year.
As previously communicated we increased the level of strategic investment in our bank over the last two years to build key capabilities and generate value through relationships connectivity and innovation approximately half of our expense growth in 2022 was related to investments against the strategy, we laid out at our Investor day, including investments and Eric.
Ladies and affluent strategy, our U S and Canadian private economy businesses and future Differentiators like direct financial services.
Rates have already delivered results in terms of market share gains in these segments robust revenue growth and a revitalized franchise with stronger customer satisfaction unemployed engagement scores and they will continue to drive diversified and profitable growth going forward contributing a substantial portion of our forecasted growth in 2023 and 20.
24.
As we indicated last quarter in light of the current macroeconomic uncertainties, we have proactively taken incremental steps to manage our expense base in short, we're maintaining our level of strategic investments, while continuing to realize opportunities for efficiency improvements based on our actions, we expect quarterly operating expenses to stabilize.
Current levels, resulting in a mid single digit growth over the prior year for fiscal 'twenty three as a whole.
We also continue to be confident in our goal of delivering positive operating leverage over the medium term as well.
We've communicated at our Investor Day last June .
Turning to slide 12, our balance sheet remains strong despite the significant draws on capital related to the legal matter and the enactment of the 2022 Canadian federal budget.
We ended the quarter, where the CET one ratio of 11, 6% down just nine basis points from the prior quarter and a strong capital generation and share issuance largely offset the one time headwinds and net organic <unk> growth.
We currently forecast our CET one ratio to continue trending higher from here ending 'twenty twenty-three around 12%.
Our liquidity position strengthened this quarter supported by continued deposit growth and moderating asset growth. We continue to monitor deposit balance trajectory on liquidity closely given the current macroeconomic backdrop.
Starting on slide 13, we highlight our strategic business unit results net income in personal and business banking was $594 million down 15% from the same quarter last year, but up 22% from the prior quarter revenues of $2 3 billion were up 4% year over year helped by strong loan and deposit growth partially off.
Set by lowering at margins wealth commissions and fees.
Expenses of $1 3 billion were up 13% from the same period last year, driven by strategic growth investments, including investments in our co brand card portfolio and related employee expenses.
On a sequential basis expenses were marginally lower and we expect them to be relatively stable going forward.
Moving on to Slide 14, net income in Canadian commercial banking and wealth management was 469 million revenues of $1 4 billion were up 4% from a year ago benefiting from strong results in commercial banking, partially offset by market headwinds, which impacted our wealth management business commercial.
Commercial banking revenue was up 17% from a year ago, driven by margin expansion from higher interest rates as well as continued growth in loans and deposits wealth management revenue was down 5% from the prior year, primarily driven by lower commissions from decreased client activity and lower assets due to market depreciation expenses decreased one.
From a year ago helped by lower performance based compensation, partially offset by strategic initiative.
Slide 15 shows U S commercial banking and wealth management results in U S dollars, where we delivered net income of $159 million down 15% from the prior year due to higher credit provisions revenues were up 10% over the same period driven by 16% increase in net interest income, partially offset by a 1% decline in <unk>.
Noninterest income.
Strong loan growth of 12% deposit growth of 4% and expanded margins supported the higher net interest income while in our wealth business, particularly strong annual performance fees somewhat offset the negative impact of market appreciation.
Expenses were 14% higher year over year, driven by ongoing investments to support our growing business and infrastructure requirements. We anticipate continued investment in this segment, but expect sequential expense growth to stabilize through fiscal 2023.
Slide 16 speaks to our capital markets business net income of $612 million was up 13% from the prior year and revenues of $1 5 billion were up 14% global markets revenue grew 17% supported primarily by client activity in foreign exchange interest rates and commodities trading direct.
Services revenue was also strong increasing 38% over the year, including the impact of deposit margin expansion in our simply business.
This was somewhat offset by lower advisory and underwriting activities due to market conditions.
Expenses of $650 million were up 9% compared to the prior year due largely to investments to continue building our differentiated franchise.
Slide 17 reflects the results of the corporate and other business unit net loss of $47 million was in line with a year ago, and 150 million better than the prior quarter.
Revenues of $129 million were up 23% from a year ago, driven by the impact of higher margins and FX translation on our international banking business, partly offset by lower income in treasury.
This quarter also benefited from nonrecurring income related to corporate and treasury activities.
Expenses were up 9% from the prior year, but down 17% sequentially and we maintain our guidance of $75 million to $125 million quarterly loss in this segment going forward.
In closing we remain focused on successfully navigating the current dynamic economic environment as we have demonstrated this quarter.
We're proactively managing expenses and our balance sheet resources, while maintaining our level of strategic investment for the future of CIBC. We started fiscal 'twenty three with solid momentum across our franchise and we will continue to leverage our past investments and our strong balance sheet to support our clients drive profitable growth and generate long term.
And to build value for our stakeholders I'll now turn the call over to Frank.
Thank you Raj and good morning, everyone credit performance this quarter continues to be well in line with our expectations.
With the increases in the allowances since Q2 of 2022 we remain well covered for any uncertainty can be upcoming quarter.
Slide 20 details our provision for credit losses.
Our total provision for credit loss was 295 million in Q1, compared with 436 million last quarter.
The provision unimpaired loans was 259 million up 40 million quarter over quarter.
We experienced higher impaired provisions in both retail and business and government loans this quarter.
In retail write offs trended higher as expected reflective of delinquencies returning towards pre COVID-19 levels.
In business and government loans higher impaired provisions were attributable to both Canadian and U S commercial banking across a broad range of effective with no specific concentration.
The provision on performing loans were 36 million in Q1, and we are comfortable with our allowance coverage. If we hadn't have had prior increases since Q2 of last year.
The economic outlook deteriorated.
Turning to slide 21, we remain prudent in our allowances given the economic backdrop.
Total allowance coverage ratio is consistent with prior quarters at 30, 63 basis points and remains above pre pandemic levels.
Slide 22 focuses on our lending portfolio mix consistent with previous quarters, our portfolio reflect strong credit quality.
Total loan balances were 531 billion of which 55% is real estate secured lending.
Our variable rate mortgage portfolio accounts for a little over one third of our mortgage portfolio and show strong credit quality and performance.
The average loan to value for uninsured mortgage portfolio, 52% up from 48% a year ago, if we've seen a continuous harvest price drop in most markets.
We continue to expect Furthermore, duration of house prices and if a revote year over year increases LTV ratios house prices peaked at around May June of last year, and we saw some slowdown of the price decreases in recent month.
The business in government portion of the portfolio, having an average risk rating equivalent to a strong triple B, which has remained steady and continues to perform well.
Slide 23 D checks, our gross impaired loans.
Overall gross impaired balances were up in Q1 with an increase in both retail and business and government loans Nufarm.
New formations were also up in Q1.
The increases are both gross impaired balances and new formations are in line with our expectations and for the most part still below pre pandemic levels.
Yeah.
Slide 24 details the net write off and 90 plus day delinquency rates of our Canadian consumer portfolios.
As communicated in prior quarters, we expected write offs and delinquencies to revert towards pre pandemic levels, which are in line with our expectations.
Slide 25 provides an overview of all Canadian real estate secured personal lending portfolio.
We continue to focus our originated efforts in the segments, where clients have deep and balanced relationships with us.
George here of our mortgage growth 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.
Our late stage delinquencies across these portfolios continue to remain low compared with pre pandemic levels.
We will continue to take a prudent approach and are closely monitoring as interest rates rise and markets evolve.
On slide 26, we have included detail on the portion of our mortgage portfolio there will be renewing in the next 12 months.
Over that period 22 billion of fixed rate and 9 billion of variable rate mortgages contractually come up for renewal.
At this time, we still have only a small portion less than $20 million of mortgage balances with clients, we see us being at higher risk from a credit perspective, and whose ltvs are in excess of 70%.
We actively monitor our portfolio and proactively reach out to clients, who are at high risk of financial stress.
Slide 27 shows our FICO score and LTV distribution in our Canadian uninsured residential mortgage portfolio.
The key takeaway is less than 1% of our uninsured mortgage portfolio has both a score of 650 or less infinite LTV over 75%.
Overall, our mortgage portfolio is well positioned and continues to perform well within our expectations.
On slide 28, we provide details of our commercial real estate exposures in both Canada and the U F C.
69% of our Canadian portfolio, and 60% of our U S portfolio are investment grade at the quarter end.
Have prudent lending standards for our CRE exposures in both Canada and the U S. With this strategic focus remaining on well capitalized sponsors with strong track record and experienced managing through economic cycles.
Our exposure in these two regions remains well diversified and continue to perform well.
In closing our performance is well in line with our expectations. This quarter and it's also better than the pre pandemic levels or credit portfolio quality and coverage continues to remain robust.
And if economic conditions evolve we continue to proactively work with our clients were more at risk to provide solutions that ultimately drive positive outcomes.
I'll now turn the call back to the operator.
Thank you.
If you have a question. Please press star one on your devices keypad.
And the first question is from Abraham Pune wallet from Bank of America. Please go ahead.
Hey, good morning.
I guess, maybe that's it.
Let's start with slide nine in terms of the NII outlook.
Talk to us in terms of the.
And I you can buy what are your expectations around NIM and what's going to be driving that and I go look in a world where balance sheet slowing and then maybe how much of a drag.
Judy and I be going forward if he takes are.
More or less done in Canada, and the U S. Thank you.
Yeah.
Morning, Ebrahim. Thanks for the question happy to take that Oh overall, what you've seen in our trajectory of NII as we've highlighted on the slide here in a number of quarters is that we've got strong momentum and we expect that momentum to continue we've got a strong balance sheet. We've got margins that are positioned to continue expanding.
With where interest rates are now and on the back of that we've produced NII growth, excluding trading up 13% over the last year.
Going forward, we've been very clear on our guidance, we've got strong margin trajectory from here. What you saw this quarter is.
Consistent with what we said a few basis points positive in terms of core NIM expansion couple of basis points that I would call more quarter over quarter noise from last quarter's negatives coming back and so forth, but I think the core NIM ex trading from that 164 level is positioned to continue increasing a few basis points a quarter.
Particularly accelerating I would say the back half of the year, maybe more stable here in the short term, but between that and continued balance sheet growth as we continue deploying capital with our clients to grow our businesses. We think that will continue driving strong NII, but.
Now in terms of your question I think it was on the trading side and what that can do again that can create some overall noise to NII between trading and non trading as you can see over the last few quarters here that may continue if rates are rates rise, but overall I would look at trading results in aggregate.
As you look at NII, excluding trading actually do.
Got it and I guess, maybe one question John .
Congratulations on the new at all maybe give us a sentiment check around.
Commercial customers clearly a lot of macro uncertainty that it seems to be normalizing, but holding up well. So maybe you see growth coming through over the next few quarters.
On the on both commercial and consumer thank you. Thank.
Thank you Ebrahim, let me, let me start with commercial there are several factors at play when you look at commercial loans. Some are macro and some are probably specific to us.
Let me start on the macro front.
Last year was a blowout year in terms of loan growth across the industry. I think the average was 17% we were probably at 19. The average over 10 years, just something like 10.
So why so high economy was strong receivables high inventories high dealing with supply chain a lot of that is winding down. So you see some sectors actually declining.
All for good reasons by the way two real estate, it's been a big area of growth real estate is quiet that'll subdue growth a bit.
Finally, entrepreneurial confidence is down versus six months ago supply chain better inflation better.
Labor at the same interest rates worse, if you put that altogether I think entrepreneurs are a little more tentative, they're looking at where interest rates are going what's the impact on the economy going to be I think that's the macro factor the micro factors or maybe specific to CIBC like in this type of environment.
We're going to be a little more conservative.
To be clear, we're going to support our clients, we know them well they've been through our due diligence we know how they operate for new clients, we're gonna be a bit more careful.
You put that altogether I see loan growth in the mid single digit range and I think we'll be in the mix on that that's the commercial side I don't think the consumer side is that much different I think youll see a tentative consumer I think you'd see product growth already slowing I think you'll see that I think you'll see growth in the where I think loans in the commercial side.
It will be mid single digits.
In the consumer side, it might be low mid single digits, but the general sentiment roughly the same.
Well, thank you for that.
Thank you. The next question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, John you were just talking about conservatism or increased conservatism.
You make underwriting decisions on the commercial side going forward. Just wondering if you could provide more detail. What if you could talk about geographically also by sector, where youre, where youre seeing more reason for caution.
Many of them just for clarity right on existing clients.
We have we have the same formula we've had for 13 years.
There's no pendulum, we keep doing the same thing we know our clients are going to help them grow and we're going to support them.
There's no sectors that we're looking at and saying we don't want to get involved what we're saying is when we look at new clients with the uncertainty out there, we're just being a bit more careful and again not all clients are created equal not all new clients not all prospects are created equal less fussed about sector more fussed about how long we know the clients if we'd been following them.
For three years or 40 years and have been in our pipeline and we have an opportunity we're going to jump if they're new clients that we don't know that well.
That exists in commercial banking you meet clients over the last some people are in your pipeline for five years and some people are in your pipeline for six months. The five year folks will be chasing them hard to six month folks who might be going a bit slower.
And John .
Specifically on the CRE side of the business and you know Theres a lot of questions about office, we're definitely seeing.
Return to work stall out so is there any change there in terms of your your view or your posturing from an underwriting perspective, when it comes to the CRE book in particular and office exposure.
So as you know we've got a we've had a longstanding CRE business I think I talked about it on Investor day 20 years.
Very low losses, so the books in good shape I've talked many times about we don't really add new clients. We've been we've been dealing with the same clients for a long period of time, they're just quiet the industry are smart they self regulate they know things are tough they've made a lot of money over the last few years Nobody's doing crazy deals so.
I think generally you'll see softness just no big volumes on office, specifically, we've got about $4 billion, 10% of our book sub lease rates are up for sure.
Most of our office is owned by institutional clients.
We're not changing our posture on office, we probably haven't grown that asset class and you.
So at least a year probably too.
So no big changes no stress no deferred payments were.
Seeing no stress yet, but it's something we're looking at of course, it's a as you said, it's a it's an evolving asset class.
Thanks for that.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, maybe I'll stick with you John just on the private wealth side I'm, sorry that you specified six 2% of net flows over the last 12 months, maybe a perspective on like what the way is not segment just to kind of get a number on that and are in a very tough years that six point too precise.
Hum above historical averages.
What was the question exactly I'm, sorry, I had trouble following oh.
John just on the private wealth side, Yeah Canadian to six 2% of net flows yeah. What's the last 12 months and it seems like a pretty good number and the top tape and I was just wondering how that stacks up versus historically and that kind of the outlook and what you're doing in that segment to get that incremental.
Thank you for the question that net flows have been good I guess the tale of two store to to have our two businesses.
The mutual fund business overall has been slow across the industry net redemptions after a record year in 'twenty. One 'twenty. Two was was negative this year so far for the whole industry negative we're in the mix, where we're having real success is in our private banking and our wood Gundy franchise.
It's just.
Normal sales discipline referrals, staying close to our clients financial planning like we've got the products. We've made the investment and we're seeing success on gundy and in the private bank and I think we're in the mix on the broader mutual fund sales feels like the industry starting to turn even on the mutual fund sales.
So probably feeling some optimism, which I haven't felt in a while and Scott just to build on John's comments again, this kind of ties back to our strategic investment agenda, we've been investing significantly in our private bank and that's been driving really strong flows.
We've been investing in our private wealth on the investment side as John mentioned CIBC Wood Gundy that that those flows are coming from existing clients. They are coming from new clients and theyre coming from more competitive recruiting as people see the investments that we're making in our platform on wealth management being something that they want to be.
Part of it and that's why you're seeing those flows and you should see those flows continue going forward.
Okay, and then maybe just lastly on I guess, what we're all very.
Solid revenue on a year over year basis, but just.
Maybe I'm just focusing on innovation banking I'm, probably some headwinds.
He tried over the last 12 months.
Maybe you can comment on that performance relative to a solid year over year growth and perhaps an outlook on it.
Fiscal 2023, perfect. So so it's John and I'll start with innovation banking and then I'll send it over to my colleague Harry on DFS. So we were we highlighted the innovation banking business on Investor Day, we put up bold targets I talked about exceeding every target we put out I'm convinced we will exceed the targets, we put out on Investor day.
All that said the industry is quieter for sure we will probably be doing 50% loan growth in the first three or four years of the franchise that's not happening today, we're watching the book carefully it's doing very well you have to remember we brought over a group of pros from Wellington they've been doing this for 20.
Years, they've been with us since fiscal 2017 with teamed up with our own our CIBC team, there's institutional knowledge around this business is performing well.
Over the five years that we've had it I think losses are under $10 million. It's.
It's just we watch we're being careful.
Inflows into the business capital going into the sector has slowed.
Slow down so we're all over it but so far no signs of stress.
I mean I'll just follow on from John There. Thank you for that for that question.
We discussed at Investor day, our our DFS or direct financial services business is really a future differentiator for our bank much like our innovation banking franchise. Just by reminder, it comprises simply which is our low cost digital banking platform, our investor's edge, which is our digital driven low cost direct investing platform and our what we call alternate solutions, which is our.
Innovative personal and b to be FX platform and it was created in 2020, just by reminder, really capture the accelerating market demand for direct banking solutions, leveraging our technology and capital markets expertise, which is really has a proven operating model fragile delivery, we have seen our investments in technology and and data.
<unk> really enabling these results that are in front of you today, we were a leader in FX payments were on boarding new clients as we execute on our on our capabilities and we're using the data analytics team to really make pricing decisions to expand on our our margins as rates increase and simply an investor's edge, though.
Pleased with these results and we think we we continue to drive that 15% growth as we laid out at Investor day.
Okay. Thank you very much.
Thank you. The next question is from Doug Young from de Sal. Thank capital markets. Please go ahead.
Hi, Good morning, just first question.
I guess Raj for you I guess credits are that'd be away was down sequentially counterparty.
<unk> was down sequentially.
Are you actively selling books or can you kind of dig into what drove this and can you also talk a bit about the outlook for our W. Way is as we move through fiscal 'twenty three.
Yeah. Thanks for the question Doug So.
The short answer is no we haven't been offloading any risk from our portfolio. We haven't done anything unusual it's all normal course, and it's really the core earnings generation from our business that helped this quarter as well as the share issuance and we had some help from market factors, particularly counterparty credit as you describe them.
A S S. But let me give you a little bit more on that so if you look at the quarter and as we've highlighted in our slides, we did generate 30 basis points of capital in terms of our growth and when we the way, we look at organic or Adobe way consumption.
It really was the organic core part, which you can see in the pillar three.
Three pack in the back you will see that there was about $4 4 billion. If you strip out FX you strip out counterparty you strip out any changes in credit et cetera, and there was a little bit of negative migration. This quarter. There was $4 4 billion of total book growth in terms of core credit and so net net you can sort of look at the 14 basis points.
Capital generation net of the credit growth the market movements were something in that 10 to 14 basis point range help as well so counterparty credit was down $2 7 billion to your point, that's just you'll see the mark to market on the asset side of derivatives also down so mark to markets came down on derivative positions that means.
We have a smaller receivable and we have less counterparty credit risk plus a S. S helped us a little bit. So that was another 14 and then our issuance was 10. So if you take those things together, that's basically what offset the headwinds and we had a total of 51 basis points right between the Canadian federal budget between the legal reserve and the phase out of the east.
I'll add back that honestly, we had so we absorbed all of that and I ended up but a negative nine so.
Where do we go from here, we feel very confident that capital continues to grow from here. So the first thing I'll say is as you saw in the press release, we did have a settlement on that on that legal file that was at a lower level. So that adds a few basis points of capital to us. So we started at around 11, seven going into next quarter and from.
That point on we've got the Basel III coming in but there may be some positive there honestly, what we're assuming at this point Theres a few things we're still landing net neutral from the implementation of the Basel III in Q2, and then going forward. We've got five to 10 basis points from that same dynamic I described we had about 14 basis points organic net Jenna.
<unk> this quarter.
Five to 10 is probably a more reasonable assumption and so you start from 11 seven you're at five to five to 10 and that takes you 12 at the end of the year without having to do anything in terms of taking off risk without having to do any model and methodology changes and I'll remind you that we do have also the U S. That's still on standardizing that.
Some point that will move to advanced which will give us some positive on top of that hopefully that's helpful.
No I definitely appreciate the color second.
I guess on Nims Canadian Nims were down quarter over quarter, but the all bank NIM ex trading was up and I'm, hoping you can kind of unpack a little bit about what drove that and and I think maybe this kind of goes to the corporate I think you talked a bit about nonrecurring items in corporate and treasury.
Now if they choose tied together and maybe you can talk a bit about what those unusual or nonrecurring items were and quantify them. Thank you.
Yeah, absolutely happy to elaborate on what I said in response to everyones question. There. So this.
This quarter there was a lot of the expansion was core NIM expansion in our businesses and what we're seeing is what we've telegraphed all along our balance sheet re prices with higher interest rates you have repricing happening on the asset side net of repricing on the deposit side, where some of that is passed on to clients and that in that dynamic ads a few base.
Points of quarter, two our nims, there's other things going on mortgage margins being lower is pressuring NIM is a little bit we've got deposit mix things going from noninterest bearing to interest bearing or term products are those kinds of things in that off a little bit, but we've assumed all of that in our forecast and so starting from this call.
Or 166.
As I said look at that as more of a $1 64. There was a couple of basis points of net positive and this is the noise that can happen in corporate and other particularly in treasury related activities quarter over quarter last quarter, we had talked about a couple of basis points negative from those items. We had said some of it is things that revert overtime into P&L summer.
What we saw this quarter was that reversion.
164, when you look at the remainder it really is the expansion in our core businesses. So you're right. If you look at Canadian TBD on its own it was down and that's largely the story of mortgage margins. When you look at Canadian P&C in aggregate as we show on this slide when you include the commercial business you include the simply business.
That business was up in them and so that contributed one basis points at total bank NIM expansion ex trading you had the EF CIB business that shows up in corporate and other part of that corporate and other NII strength is F. CIB that business is positioned to benefit from higher U S interest rates as well and the U S business was very strong. So that's the idea in the U S business combined.
That contributed another basis point and there was another basis point in corporate and other that I would say it was core. This is part of we talked last quarter about how we had a little bit of excess liquidity you would've seen our cash resources were about $15 billion higher than they are this quarter. So when cash comes in through deposits and the short term we can't deploy it in the long term.
We put that to good use in treasury and HQ L a or in Ohio yield on it and that was also helpful. So I would say it's three of that basically three of the five is those three elements and that continues that's why I would start from 164 and go forward and I will say, we are seeing some momentum over time towards the end of the year, we see more acceleration at this.
Point, maybe a little bit more stable than the front half and that includes some assumptions that we're making around continued pressure on non interest sensitive or noninterest bearing deposits going to higher price deposits, but that's the one risk we have a good amount of that assumed in our forecast, but if that is more pronounced than what we are.
Seeing and we're seeing that across the industry. This isn't a CIBC thing that could put a little bit more pressure, but still some upward trajectory. The bar mentioned margins, but maybe a little less than we would have otherwise anticipated today I would tell you. We said 10 to 15 basis points Q4 to Q4 'twenty two to 'twenty, three probably closer to that 10.
But still possible to be around that range.
Very helpful. Thank you very much.
Thank you. The next question is from Gabriel Deschaine National Bank Financial Please go ahead.
Good morning, I didn't want to stick to the the NIM outlook thing and you know you're talking about the no acceleration in the back half I just want to know what you have in your.
The outlook, there as far as macro environment, what if.
Do you still have rate hikes flat rate like what why.
My actual question is what happens if rates are cut.
It's about that kind of.
I think that's more positive.
Yeah. Thanks, Thanks for the question Gabe I'll take that and so what we've assumed this is always the same for US right. We don't try to predict the market. So we take the market's view of the markets. So as I referenced in my remarks. This assumes that current forward curves and the current forward curves don't anticipate cuts for the rest of this fiscal year.
And so we're generally assuming Canada is a you know it is largely done maybe there is another one there.
And then in the U S theres, a little bit more to go but not anticipating any cuts we're assuming some like I said the migration of deposits. We're assuming are the.
Mortgages in Canada, what we're seeing is good positive momentum and the new commitments in terms of margins more towards normal not quite back to normal, but we're assuming again conservatively, we don't quite get back to normal, but it's better than what it was maybe last year. So all of those factors go into go into that forecast and so if.
There is a cut you see our disclosures around interest rate sensitivity that does over time add up but if you talk about a we have a 100 basis points is around $300 million to the negative. If you talk about one cut over the short term, it's pretty immaterial it might be sort of low single digit eight basis points over time, and then it will spool up after that.
But there are those hedges don't Oh work, the other way or they they do help they do help that's why that's why you don't feel as much of it right up front right remember a part of our exposure is to short term rates and so when you see the actual cut and the front end of the curve declines you feel some of that.
Right away and then where the hedges come in is the fact that you don't feel 100% of that and so generally right around 60% of our exposure right upside downside has been to long rates and so that takes several years to pricing, but you'll feel some portion of it right away.
Okay, I, though typically are trading questions because I don't have the hockey people don't usually like to give up the secret sauce, but this is a massive trading number especially in rates. Just wondering you know what happened this quarter that was particularly beneficial and you know.
A main item that fluctuate a lot so could we see a similar number of sustained or or not.
And then kind of tying into that but the capital question borrowers up but market risk weight.
Risk weighted assets were down is there you know.
The composition of your trading yoga about resolved or watch what it does.
Risk weighted assets go up in the category.
Good morning, it's Harry here again, I'll I'll take there either.
Yeah. So indeed, it was a very strong quarter really across the platform I talked about DFS a moment ago. So.
But what's happening here is we're focusing on executing on the strategy. We've laid out for a number of years and the investments in our platform are really allowing us.
To deliver results in the most difficult of times for our clients are the most challenging times, but I would say that this is this is a very well diversified.
Client franchise Youre seeing.
Delivering a outsized returns.
We are maintaining and growing our market share with our core Canadian clients from a trading perspective, and really from a corporate investment banking perspective, and we're growing our U S platform as we've talked about and the areas of relative and comparative advantage and Victor alluded to some of that earlier.
Targeting growth north of 10%, there and all that comes together with our connectivity with the rest of our bank as we deliver capital market solutions to all of our clients.
The results were very strong the trading environment was a I would say exceptional.
We continue to execute on our strategy the particulars for the quarter was particularly strong we expect the results to be in line going forward, what we've outlined at Investor day, which was a growth of around 7% to 10% a year across our capital markets platform, we're pretty confident in those numbers. If that's helpful. In terms of the var.
Usage harass you talked a little bit earlier about counterparty credit risk and so on what I would say is redeploy risk to our clients and so we don't have standalone proprietary operations, the vars devoted to our client.
Activity and that that continues and our clients are very active at this point in time.
Oh, you mean the vertical.
All right somebody goes up.
Back in Analyst School, Atlanta, cousins or they'll be ready to.
Go up but.
That's right. Thanks.
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Thank you. The next question is from Lamar per start persaud.
Her saad from Cormack Securities. Please go ahead.
Thanks, I wanted to maybe start off with Frank just given the normalization of impaired PCL. This this quarter can you talk to your outlook for the year I think the message is that we should still think about normalization to historical averages, but any thoughts would be helpful.
I think your for.
Thank you for the question Lamar and every pair during my prepared remarks, we're very pleased with the performance and resilience of our credit books are performing well within our expectations.
Maybe if you pointed out we did previously communicated that we do not expect lower levels that were experienced over the last one or two years to sustain and they're more uncertain and challenging macroeconomic environment and I want to reiterate our outlook off normalization towards pre COVID-19 levels and.
I'm expecting our impaired PCL ratio to trending towards that made for a 20 to 30 basis point range.
That we previously communicated.
I think for fiscal 'twenty free we can expect to be at the lower end of that range, but our overall guidance and outlook still remains intact.
Okay I appreciate that and then.
Just flipping over to harass you'd mentioned you're.
You're building up towards 12% CET, one ratio by the end of 2023.
Is that similarly, just continue continued normalization to historical averages or does it allow for something more and specifically you're just referring to the CET one ratio impact of.
Sure.
Yeah. Thanks. Thanks for the question on them are and we've been pretty conservative in terms of our outlook to 12% and so when I talked about that are you know, adding five to 10 basis points roughly range on average on a quarterly basis.
That assumes that there is some normalization of the environment right. We did have some negative credit migration. This quarter, we're actually assuming more than what we had this quarter.
We're also assuming that counterparty credit risk amount that came in.
Based on you know natural gas prices affects prices interest rates and so forth and so we're assuming some of that will revert back out won't stay at these levels and so.
The the way I would think about it is as of now we have the ability to generate seven and 10 basis points in terms of core earnings net of organic RW outgrow it to support profitable growth in our clients and those negative items, they roughly add up and are forecast to what the issuances are through our drip pro.
Graham and other programs and so think.
Think of it as roughly in the order of 10 basis points of negative headwinds, we're expecting from the environment normalization or getting more more pessimistic, even and then that gets offset by the drip, which still allows us to continue having seven to 10 basis points since I will leave the drip on for now and once the environment's more certain when some of the negative.
That outlook out there it gets better then at that point, we'll revisit it but I think it gives us the ability to absorb those headwinds right now.
I appreciate the time thanks.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Okay. Thank you most of my questions have been asked and answered just for quickly or actual classification.
In your comments when you were talking about.
Expectations for expense.
Our balance of year, you made lots of things to prior period investments and reaping the benefits of that I don't think I heard you mentioned inflation at all can you just talk about what sort of inflation, that's factored into that sort of expense growth and could that be a source of positive or negative side.
Okay.
Thank you sorry, if I did mention it.
Inflation in the prior year and 'twenty two as having been a driver. So if you look at our expense growth last year right half of it was roughly our investments the other half of it was our other core operating expenses and a good portion of that was the impact of inflation, what we've assumed going forward as it is.
Pretty in line with what Youre seeing some normalization through 'twenty two 'twenty three and so you are seeing inflation starting to come down and we've been a bit more scientific than just looking at headline numbers. We've looked at our expenses, we know what's already been.
Just it for inflation and what may be adjusted coming forward.
And so based on what I see right now I don't think that's a material plus or minus and so overall, we're still confident with that in mind, we will stabilize expenses around these levels. We are continuing to invest on a sequential basis as revenues grow and expenses stay stable.
That's a positive result, and that's what will allow us to get to that positive operating leverage over time.
Okay and then.
Maybe I'll just come back to John John .
I think it's been less than a month, maybe that you've got the official that Canadian banking's kind of segments.
Any any early impressions worth sharing with it with US right now with just a fresh set of eyes.
Albeit.
Less than a month.
Thank you for the question Sohrab, but yeah I do have some first impressions first on strategy we.
We outlined at an Investor day early days for me, but I don't see major changes are we're focused on execution.
And when we think about execution, it's kind of in three key themes.
First segments, you will see us push much harder and Imperial service.
I think that's a big differentiator to win in mass affluent we have to we have to leverage Imperial service. Some more on that down the road to we need to get better at small business.
We've made big investments over the last two years, both in people and in technology and again to win in mass affluent you need to be able to deal very well with small businesses and the entrepreneurs so more to do there.
On the strategic investments I think both <unk> and Victor spoke into it we've made some important investments over the last couple of years.
There's financial planning there's investments in CRM, we bought a co brand we invested in our co brand card, we're going to harvest those investments every one of those business cases had strong financial metrics against them, it's our job to deliver those metrics and I think we can and.
And finally, we're going to how to operationalize. This is always kind of tricky.
Theres more heavy lifting to do there's more investments to make but we're going to pace ourselves we're going to focus on margins, we're going to focus on investing on the unexpected and I think what you'll see in a pretty short term its improvements on both fronts. So to conclude first first 30 days, if it's not obvious in my voice I'm pretty excited.
Thank you very much.
Thank you. The next question is from a guy called me he'll each from RBC capital markets. Please go ahead.
Alright. Thank you for taking my question I know its getting a little late here on the call.
My question is also for John Hunter loss, but it refers to the mortgage business I was hoping maybe you can help me.
Understand some of the dynamics that are happening on the ground and I'm specifically looking at your slide 35.
Now when I look at this slide.
The first thing that comes to mind as I think maybe in the past you may not be showing us. This information in the same way I think this slide is purely originations correct me if I'm wrong.
L J.
Just a few questions come to mind and I'm, hoping to better understand what I see here first with respect to originations at 9 billion, that's down 47% year over year typically we see this progress to higher originations in the next couple of quarters. So I am curious if you think that might actually happen. This year. The second observation is when I look at.
The loan to value distribution at the bottom part of this graph I think correct me if I'm wrong. This pertains to the originations that happened in quarter.
And if that's the case, what I see is people that put down the smallest amount of down payment.
Our going variable rate mortgage despite the fact that the variable rate is higher than the fixed rate.
So I'm curious if that is something thats being advised to the customer if that's new that would be like relative to history, something that's new that's going on and lastly, John is that experience do you think based on what you see kind of market wide or or might this be a little CIBC specific thanks.
Okay, Darko Hi, it's Frank here I'll, probably take the first few of your of your comments or questions. So Youre right page 35 shows originations and that number is down year over year.
It's probably a reflective of a slower mortgage market right now compared to a very very strong market that we saw last year and that of course had an impact on our new originations and similarly, if you pointed out FICO score distributions and go into value as well.
<unk> current originations in the quarter.
I think it's page 27, where we show the same statistics for our entire portfolio.
So that's how you could compare those those too.
And then.
This slide.
There's a slight higher percentage of people in those 75 per cent buckets fatigue variable rate mortgage book I don't think it's necessarily advice it for.
Clients choice that we're working with clients are we've also seen a drawn can can add anything here, but we've also seen be sure all variable rate mortgages dropping with the interest rate environment evolving, but that number would have come down from from previous quarters quite a bit.
Yes, 70, 70% of close John 70% of clients today are taking fixed rate terms, 30% center, taking variable that's a bit of a difference from last year and again as a as Frank said advice depends client by client based on their individual circumstances.
And do you think John is it any different than the industry.
What was the question is growth going to be different but that's the question.
Oh, no yeah, I am looking for an outlook as well on originations, but do you think that you know when.
When we think about variable rate versus fixed do you think you are any different than theirs. Okay.
And in terms of again I think.
Youll see mortgages Darko in the in the low single digit range there throughout the year. It's it has slowed down right.
Okay. Thanks, very much that's very helpful.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
I'll try to be quick here I could go back to you for a moment, obviously, a big number in the trading side is as other folks have offered I went looking around for quarters that even came close to $206 million interest rate trading and.
I I don't think it's a coincidence, but it just happens to be those quarters when credit spreads came down a classic example would be Q3 'twenty when credit spreads came in so.
It would appear to me that what we're seeing at least in part is some mark to market on.
On the on the fixed income book first of all do I have that right.
Good morning, Mario No I don't think you have that right.
This is this is not about the inventory we hold this is about doing client activity client transactions.
So very well diversified in the credit space in the right space in the commodity space and the FX platform, which as you know we've invested in very heavily over the years. So I would say it is an outsized quarter. Indeed extreme client activity in volatile times, and we're able to actually I think be therefore.
Our clients and really volatile markets, given the technology and the systems, we have in place and of course, our talent back to front.
Harry just a coincidence than that every quarter, where credit spreads came in.
The fixed income trading was really strong or is it really that declining credit spreads lead to increased trading activity.
It seems like more than just a coincidence.
I think its the latter I think our clients are more active in general in that environment, I would say, though that as you've seen even in extremely volatile markets that are not completely disrupted we do outperform and you've seen that over over the years, you've seen the stability earnings be.
Front are front and center for us as we try to deliver a consistent sustainable earnings growth and the capital markets platform really delivering all of capital markets to our clients. So I would say, it's the latter our clients are very active larger transactions that are that are really about delivering the global markets our products to our <unk>.
Corporate and institutional client base that are covered by the corporate and.
An investor.
Client franchise, so I don't I don't think I answered your question, specifically because I think it really is symptomatic of the markets and they're very active and we're there for our clients.
Got it let me move on to deposits for a moment.
We're seeing deposit attrition like deposits actually coming off the balance sheet not in Canada, certainly not for CIBC deposits look fine.
But it's no secret that is happening in an accelerated way in the U S can anyone offer an outlook on why Canada is different is it simply that we just didn't we didn't there wasn't as much of a spike in deposits during the pandemic.
What's your what's your outlook there.
Well, it's always difficult to ascertain why specifically Canada is different in this instance, Mario I think it has to do with a number of different things I think when you look at the stimulus that was provided in Canada through the emergency wage subsidy Vascepa program they serve a.
Ram the student program.
Alan for pound the stimulus was large.
That's number one number two is Canadians, we tended to open up slower than the United States did so there was a tendency to spend less and three there is a conservatism factor in there that's playing out.
That's I think in a nutshell why you see on a relative basis, a slower burn off I think those deposits will burn off over time.
We're prepared for that we're managing around that the question that <unk> raised earlier is more gonna go from noninterest sensitive to term we've planned for that as well I think the most important thing strategically for us as a bank is are we growing deposits in those areas across our franchise, we're growing them in the Canadian personal bank.
We're growing them in the Canadian commercial bank, we're growing them in the innovation bank, we're growing them in the U S Bank, we're growing them in our corporate bank and that's just a function of how we're serving our clients. We are a diversified relationship oriented bank and it's coming through in terms of all of our numbers, including deposits going forward.
And then finally E. Victor you offered that the bank did experience all while that could experience some deposit burn off as you said can.
Can you offer an outlook on.
Either for CIBC or if the bank has thought about it.
Canada generally.
How much what would you peg our excess deposits right now in the banking system to be are we in that sort of $400 billion range, but what do you think it's all it's a $150 billion to $200 billion in total.
That's what you think for the like for the banking system in total $150 billion to $200 billion right. Yeah. Yeah. In some of the most of that is you know stimulus, but some of it is money moving from markets from equities and from bonds and a fixed term deposits right and just consumers are behaving rationally when you're getting 4% on one year money they say well.
Mark that until the certainty comes back I think part of what's going to happen going forward is some of it will go back into the markets as situations normalize and some of it is just going to be the burn off of excess deposits from stimulus overtime.
That's helpful. Thank you. Thank you Mario.
Thank you and this is all the time, we have for questions I'd like to turn the call back over to Victor well you've been extremely generous with your time, everyone. So I want to thank you for that and thank you operator, so just to recap we.
We delivered solid first quarter results in the face of an increasingly challenging and dynamic environment. Despite continued geopolitical tensions and inflationary pressures, which we see each and every day our core CIBC franchise demonstrated the benefits of diversification demonstrated the benefits of our unrelenting focus.
On our clients and we hope that you got the points that it's demonstrating the investments that we've made in the past in organic growth and that we believe that we can harvest going forward you see that across all of our businesses, whether it's the innovation bank are awful, our our affluent strategy, our capital markets and DFS strategy and our.
U S strategy, we've exhibited our resilience in difficult times in the recent past and we're confident in our ability to navigate the current economic environment. Our relentless focus on our clients will be it will continue to deliver successful outcomes and we're gonna help them make their ambitions, a reality and create value for our shareholders over the long term.
Finally, we remain well capitalized and well provisioned with a strong balance sheet.
In conclusion I want to thank all of our CIBC team members globally for bringing our purpose to life every day. It's thanks to our collective dedication that we have built a relationship oriented bank that is positioned to continue to bring the best of our bank to our stakeholders all of our stakeholders and to our shareholders. Thank you for your continued interest.
Support we look forward to sharing our results next quarter Bye now.
Thank you Nicole.
France has now ended please disconnect your lines at this time and we thank you for your participation.
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