Q2 2023 Canadian Imperial Bank of Commerce Earnings Call

Speaker 3: Good morning and welcome to the CIBC Quarterly Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Jeff Weiss, Senior Vice President, investor relations. Please go ahead Jeff.

Speaker 4: Thank you and good morning everyone. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer, followed by Harat Panosian, our Chief Financial Officer, and Frank Guse, our Chief Risk Officer.

Speaker 4: Also on the call today are a number of our group heads including Sean Bieber, US Region, Harry Cullum, Capital Markets and Direct Financial Services, and John Huntallis, Canadian Banking. They are all available to take questions following the prepared remarks.

Speaker 4: For those participating on the Q&A, given you have a hard stop to get to another presentation at 8.30, please limit your questions to one so we can allow as many of you as possible to participate. We will make ourselves accessible after the call for questions or follow-ups. As noticed on slide 2 of our investor presentation, we will now take a short break.

Speaker 4: Our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially. With that, I will now turn the call over to Victor.

Speaker 5: Thank you, Jeff, and good morning, everyone. I'll start our call today with an overview of our second quarter performance, followed by insights on the current financial sector dynamics as well as CIBC's resilience as we navigate a fluid economic environment.

Speaker 5: This morning we announced adjusted second quarter revenue of $5.7 billion, which is up 6% from the prior year. Our strong performance is a testament to our client focused strategy and the hard work of our CIBC team members to create value for all our stakeholders.

Speaker 5: During the quarter, we continued to leverage past investments while moderating expense growth.

Speaker 5: Expenses of $3.2 billion were down 1% sequentially and up 7% year over year. And this is within the previous guidance that we've provided you.

Speaker 5: Pre-provision pre-tax earnings of $2.5 billion were up 6.6 percent from the prior year, while net income of $1.6 billion was 2 percent lower, as impaired credit provisions continued to normalize. Again, as expected.

Speaker 5: We are vigilant in our risk management and continue to closely monitor our asset classes and client segments for signs of stress, taking proactive steps to address potential exposures.

Speaker 5: Broadly speaking, our loan portfolio continues to perform well in an evolving economic environment. We're comfortable with what we're seeing despite market-wide challenges in certain pockets of commercial real estate, particularly in the U.S. office sector.

Speaker 5: Overall, our portfolio has prudent and disciplined lending standards with conservative caps on loan-to-value ratios and good debt service coverage.

Speaker 5: Frank will provide additional details on our portfolio in a few minutes.

Speaker 5: Earnings per share were $1.70 this quarter, and we have announced a 2-cent dividend increase to our common shareholders.

Speaker 5: Going forward, we will adopt an annual review of our dividend payment instead of the semi-annual pattern of the past. We will review our dividend on our fourth quarter earnings call and annually thereafter. We intend to continue increasing dividends in line with earnings growth, while maintaining a dividend payout ratio.

Speaker 5: of between 40 and 50 percent over the long term. Our capital position remains strong with a C2-1 ratio of 11.9 percent. I'll have further comments on our capital and liquidity following comments on our core businesses. So I'll turn to the core businesses now. First, our Canadian consumer franchise. Our investments here are deepening.

Speaker 5: who've also joined our bank last year.

Speaker 5: To date, these clients have brought over $3 billion of incremental funds managed to CIBC beyond their credit card balances.

Speaker 5: Our North American commercial banking and wealth management businesses continue to see year over year loan growth in the 9 to 10 percent range, albeit at a slower pace than prior quarters. Again, something we expected.

Speaker 5: Not surprisingly, client sentiment is more cautious as macroeconomic headwinds weigh on the near-term investment outlooks. Given the environment, we're focusing on supporting our clients and helping them navigate this period of increased volatility, something that the CIBC does through the ups and downs of the economic cycle.

Speaker 5: We remain thoughtful and maintain a disciplined and prudent approach to capital deployment.

Speaker 5: In wealth management, while challenging market conditions, tempered client activity during the quarter, our unique structure of commercial banking and wealth management teams working together will continue to drive strong referral activity to serve both the business and personal needs of the entrepreneurs we serve within our bank.

Speaker 5: In capital markets, our franchise continues to deliver top-line growth despite a slower underwriting environment.

Speaker 5: In line with our strategic objectives in this business, we continue to grow our revenues in the United States and play a leadership role in sustainable financing.

Speaker 5: This quarter, Direct Financial Services reported strong results as currency conversion activity increased with travel recovery and Simply Financial benefited from higher deposit margins.

Speaker 5: So now let me spend a moment on the current banking sector environment.

Speaker 5: In recent months, isolated challenges emerged for several banks outside of Canada.

Speaker 5: Over the past several years, armed with lessons learned and the resolve to be a more durable bank for our stakeholders, we've been executing on our long-term strategy to build the strong and resilient bank that CIBC is today.

Speaker 5: We have a strong, well-capitalized balance sheet, and we have the capabilities required to generate capital on an ongoing basis while also supporting our growth.

Speaker 5: We continue to build on our capital position this quarter and at 11.9%, our CET1 ratio is now approximately $3 billion above the current regulatory requirement.

Speaker 5: We also have a sustainable funding strategy that's underpinned by a well-diversified, high-quality client deposit franchise and supplemented by wholesale funding that's purposefully constructed across investor types, across geographies, across currency maturities, and across funding instruments.

Speaker 5: To help by our stable funding base, we ended the quarter with a liquidity coverage ratio of 124%, including $177 billion in high-quality liquid assets, which represents $34 billion of surplus over cash flow obligations under a 30-day stress scenario.

Speaker 5: Also, embedded in our strategy and our approach to doing business is our commitment to enable a more secure, equitable and sustainable future.

Speaker 5: We continue to make good progress on our ESG initiatives across the spectrum this quarter. We were recognized as one of Canada's best diversity employers for the 13th consecutive year, and we rank number one in Canada for gender equality by equally for the third consecutive year.

Speaker 5: These recognitions are testaments to the work we're doing to drive positive change and we're committed.

Speaker 5: to continuing our efforts using our resources and our technology investments for good.

Speaker 5: In closing, while the near-term macroeconomic environment remains challenging, I think we all see that with expected headwinds to economic growth and geopolitical instabilities, we have the strength to weather periods of uncertainty in the near term and importantly the right strategy to drive solid results over the long term. And with that, I'd like to pass the call over to Haraj.

Speaker 5: for a detailed review of our financial results. Raj? Thank you, Victor, and good morning, everyone. Thank you for joining us.

Speaker 6: Our bank delivered solid results for the second quarter of 2023, supported by the embedded growth momentum from our past strategic investments, which is helping offset the impact of a more challenging environment.

Speaker 6: Deluded earnings per share were $1.76 for the quarter, up 9% year over year.

Speaker 6: Excluding items of note, we generated adjusted EPS of $1.70 and ROE of 13.9%.

Speaker 6: despite the disruptions faced by the broader banking industry during the quarter our balance sheet remained resilient as we strengthened our capital ratios and maintained excess liquidity

Speaker 6: The balance of my presentation will refer to adjusted results which exclude items of note starting with slide 9.

Speaker 6: Adjusting net income of $1.6 billion for the quarter was down 2% from the prior year, driven primarily by higher credit provisions, largely in our U.S. portfolio. While provisions for credit losses continue the anticipated normalization, our overall credit quality remains strong, as Frank will cover in further detail.

Speaker 6: Revenues of $5.7 billion and pre-provision pre-tax earnings of $2.5 billion were up 6% from a year ago, benefiting from balance sheet growth across all our businesses, resilient margins and higher fee income.

Speaker 6: Expenses were up 7% from the prior year and down 1% sequentially for the second consecutive quarter.

Speaker 6: By 10, highlight the drivers of net interest income, which was up 3% from the prior year. And excluding trading, NII was up 10% as a result of continued loan and deposit growth.

Speaker 6: Total bank NIMM excluding trading was largely stable over the quarter benefiting from strong margin expansion in our PNC businesses offset by lower margins in the US and capital markets.

Speaker 6: Canadian PNCNIM of 257 basis points was up 9 basis points sequentially and 19 basis points over the same period in 2022.

Speaker 6: Deposit margins continue to expand in this business supported by higher rates, partly offset by pressure on asset margins, most notably mortgages.

Speaker 6: NIM in our US segment was 341 basis points, up two basis points year over year, and down 13 basis points from the prior quarter. All deposits in our US bank have been stable over the year.

Speaker 6: The segment's NIM this quarter was impacted by recent deposit trends across the industry and the lag in rate resets on loans.

Speaker 6: As we've communicated previously, we manage our balance sheet to protect margins and deliver sustainable NII outperformance over the medium term. As a result, we continue to expect modest upward momentum in NIM, excluding trading, which will support ongoing NII growth. Trade 11 provides further disclosure on balance sheet growth and margins.

Speaker 6: loan balances average 535 billion in the quarter an increase of 9% from the prior year supported by all businesses

Speaker 6: Client deposit growth outpaced loans over the same period, increasing 10% to an average balance of $520 billion. While we continue to see a shift from non-interest-bearing to interest-bearing deposit, betas on notice and demand deposits are performing well and have been supportive of overall margin stability.

Speaker 6: We have a strong deposit franchise across our bank which supports balanced stability and profitable growth.

Speaker 6: We continue to be focused on growing funds managed with an emphasis on stable client deposits and lending in key client segments with strong risk-adjusted returns.

Speaker 6: Turning to slide 12, non-interest income of $2.5 billion was up 10% from the prior year supported by growth in trading income, which moderated this quarter from a very strong Q1.

Speaker 6: Excluding trading, market-related fees continued to see some pressure, down 1% year-over-year and sequentially. Offsetting this, transaction-related fees were up 4% year-over-year, driven by strong card and credit fees, while sequential declines were mainly related to less days in the quarter.

Speaker 6: Turning to slide 13, expenses were up 7% from a year ago largely due to a higher employee compensation, the impact of inflation, and our focused strategic investments to deepen our capabilities in high-growth segments, build our future differentiators, and to simplify our bank.

Speaker 6: These investments accounted for approximately half the expense growth over the last year, and they are already delivering results. Specifically, client acquisition in key segments, robust revenue growth, positive employee engagement scores, and strong client satisfaction.

Speaker 6: As previously communicated, we continue to take proactive steps to manage our expense base by maintaining steady strategic investment in priority areas while continuing to realize opportunities for efficiency improvements in everything we do.

Speaker 6: As we have demonstrated, this will result in relatively stable quarterly expenses in the short term, fiscal 2023 expense growth of mid single digits, and positive operating leverage over the medium term.

Speaker 6: Turning to slide 14, our capital position improved 26 basis points sequentially, driven by strong organic generation and share issuances partially offset by RWA growth.

Speaker 6: As we had telegraphed, the net impact of the Basel III reforms was modest, contributing a few basis points. We are confident that our CET1 ratio will continue trending higher, ending 2023 above 12% as we've previously guided. Despite the disruption in funding markets during the quarter, the net impact of the Basel III reforms was modest, contributing a few basis points as we've previously guided.

Speaker 6: our liquidity position remained well above minimum regulatory requirements throughout the quarter.

Speaker 6: Our Avalere JLCR was 124% and we ended the quarter significantly higher than that.

Speaker 6: We expect to maintain modestly higher liquidity in the short term given the uncertain environment.

Speaker 6: Starting on slide 15, we highlight our strategic business unit results. Personal and business banking net income was $643 million, up 11% from the prior year and 8% sequentially driven by robust revenue momentum.

Speaker 6: Revenue of $2.3 billion was up 7% year-over-year helped by strong deposit margins and volume growth. On a sequential basis revenue was up 1% driven by expanding margins which more than offset the impact of the shorter quarter.

Speaker 6: Expenses of $1.3 billion were up 8% from the same period last year, driven by employee count and compensation changes, as well as expenses related to the Co-Brand credit card portfolio, which was acquired partway through the second quarter last year.

Speaker 6: Moving on to slide 16, net income in Canadian commercial banking and wealth management was $452 million. In pre-tax earnings of $663 million, we're up 2% from a year ago.

Speaker 6: and pre-tax-free provision earning growth benefited from 15% revenue growth in commercial banking, partially offset by 6% revenue decline in wealth management due to the negative impact of markets.

Speaker 6: Expenses increased 3% from a year ago mainly due to higher employee costs partially offset by lower performance-based compensation.

Speaker 6: That income of 50 million US dollars in US commercial banking and wealth management was down 67% from the prior year, most notably due to higher credit provisions.

Speaker 6: Revenues were up 2% over the same period, driven by an 11% increase in net interest income supported by higher volume, partially offset by 15% market related decline and non-interest income.

Speaker 6: Expenses were 4% higher year over year due to ongoing investments in people and technology offset by variable expenses.

Speaker 6: to improve. Turning to slide 18 in our capital markets business, net income of $497 million was down 8% year over year from a very strong quarter last year. Revenues of $1.4 billion were up 3% over the prior year, supported by direct financial services growth of 34%.

Speaker 6: largely due to deposit margin expansion and simply. This was largely offset by lower trading revenues and underwriting activity due to market conditions.

Speaker 6: Expenses of $664 million were up 12% compared to the prior year, largely due to investments in our team and infrastructure to support key initiatives.

Speaker 6: Slide 19 reflects the results of our corporate and other business unit. Net loss of $33 million was $104 million better than the prior year and $14 million better than the prior quarter.

Speaker 6: revenues of 76 million were up 53 million from a year ago, driven largely by our international banking business and higher revenues from strategic investments.

Speaker 6: Expenses were down 5% from the prior year and 6% sequentially.

Speaker 6: We maintain our medium-term guidance of 75 to 125 million quarterly loss in this segment, including the cost of maintaining elevated liquidity reserves.

Speaker 6: In closing, this quarter's results underscore the benefits of our client-focused strategy, our disciplined approach to resource allocation, and the resilience of the CIBC franchise in the face of market headwinds.

Speaker 6: Recent industry events have demonstrated the value of our diversified business, conservative risk posture and strong stable balance sheet.

Speaker 6: These strengths position us well to deliver long-term sustainable value for all our stakeholders through periods of disruption. As we've done this quarter, we will continue to manage through the current macro uncertainties proactively by emphasizing margins and efficiency to deliver near-term results without sacrificing the long-term.

Speaker 6: With that, let me turn the call over to Frank.

Speaker 7: Thank you, Haraj, and good morning, everyone. Thank you, too. Our retail and business and government portfolios continue to show resilience.

Speaker 7: While uncertainty remains on the macroeconomic outlook, as expected, we continue to see a normalization of credit conditions to pre-pandemic levels.

Speaker 7: Turning to slide 22, our total provision for credit losses was $438 million in Q2.

Speaker 7: compared with $295 million last quarter. The provision on impaired loans was $379 million, up $120 million quarter over quarter.

Speaker 7: We experienced higher impaired provisions in both retail and business and government loans this quarter. ensure that you are paid for business and your balance sheet.

Speaker 7: In retail, write-offs trended higher as expected, reflective of delinquencies returning towards pre-pandemic levels. In business and government loans, higher impaired provisions were mainly attributable to office exposures in the U.S. Institutional Real Estate book.

Speaker 7: The provision on performing loans was 59 million in Q2, reflective of changes in forward-looking indicators for our retail portfolios. This was more than offset by changes to our economic outlook and credit migration in the US commercial portfolio.

Speaker 7: Turning to slide 23, our allowance remains prudent given the economic backdrop. The overall increase this quarter is mainly driven by our revisions to the economic outlook. Remain comfortable with our allowance coverage overall, which are also above pre-pandemic levels. Slide 24 focuses on our lending portfolio.

Speaker 7: our mortgage portfolio and show strong credit quality and performance.

Speaker 7: The average loan-to-value for our uninsured mortgage portfolio was 53%, up from 46% a year ago, as we've seen a continued house price softening in most markets.

Speaker 7: Recent trends seem to indicate a stabilization in major markets and we would expect loan-to-value ratios to improve in the quarters ahead.

Speaker 7: The overall business and government portion of the portfolio has an average risk rating equivalent to a strong triple B which has remained steady and continues to perform well.

Speaker 7: Slide 25 details our gross impaired loans. Overall balances were up in Q2, mainly driven by business and government loans. New formations were also up in Q2. On the new formations this quarter, $370 million is related to our U.S. commercial real estate business.

Speaker 7: Slide 26 details the net write-off and 90 plus data link-in-the-rates of our Canadian consumer portfolios. Communicated in prior quarters, we continue to expect write-offs and the link-in-the-rates to revert towards pre-pandemic levels.

Speaker 7: The overall delinquency and write-off movements in retail this quarter are well in line with our expectations.

Speaker 7: July 27 provides an overview of our Canadian real estate secured personal lending portfolio. Our overall late stage delinquency rates continue to remain low and stable compared with pre-pandemic levels.

Speaker 7: The mortgage portfolio continues to show resilience to interest rate increases with renewal metrics that are stable.

Speaker 7: Our non-amortizing portion of the variable rate mortgage portfolio has meaningfully improved quarter over quarter from $52 billion down to $44 billion.

Speaker 7: Our clients are adjusting to higher interest rates by taking proactive steps to address their variable rate mortgage payment shortfall. Around 75% of the reduction this quarter is driven by clients voluntarily increasing contractual fixed payments for the remaining terms.

Speaker 7: with the balance of clients renewing or converting to fixed rate mortgages. We will continue to work closely with our clients as we closely monitor interest rate and market development.

Speaker 7: Slide 28 covers details of our commercial real estate exposures in both Canada and the U.S.

Speaker 7: 69% of our Canadian portfolio and 58% of our US portfolio are investment grade at quarter end.

Speaker 7: We have prudent lending standards for our commercial real estate exposures in both countries, with a strategic focus remaining on clients, where we can develop and maintain long-term relationships. Our exposures in these two regions remain well diversified and continue to perform well, notwithstanding the pressure we have seen within the U.S. office portfolio.

Speaker 7: On slide 29, I'd like to provide some additional details on our US office exposure.

Speaker 7: The US office portfolio represents 1% of our total loan book and comprises 21% of our overall US commercial real estate And that is down from 26% in 2019 Over 50% of the portfolio consists of class a properties We have a dedicated team of experienced commercial real estate professionals

Speaker 7: We're actively and proactively managing and monitoring the portfolio.

Speaker 7: remain comfortable with provisions at this time, but the US commercial real estate market continues to evolve and we are very focused on working with our clients.

Speaker 7: In closing, our performance is still within our expectations and remains stronger than pre-pandemic levels.

Speaker 7: Our credit portfolio quality and coverage continue to remain robust. Communicated in the prior quarters, we are seeing impaired provisions for credit losses gradually increase.

Speaker 7: We remain comfortable with our guidance on overall losses in the 25 to 30 basis point range. Depending on prevailing market conditions in the second half of the year, we could expect to trend to the high end of this range.

Speaker 7: As economic conditions evolve, we will continue to proactively work with our clients. I will now turn the call back to the operator.

Speaker 8: Thank you.

Speaker 3: We will now take questions from the telephone lines. Please press star 1 at this time if you have a question.

Speaker 3: There will be a brief pass for participants registered for questions. We thank you for your patience. Thank you for your patience.

Speaker 3: Our first question is from Ibrahim Poonawalla, Bank of America. Please go ahead. At the time ofgy ofm o s

Speaker 9: I guess maybe question for you, Haraj. Going back to the slide 10 around the margin breakdown both in Canada and the US.

Speaker 9: Obviously your Canadian name it feels like but the trend relative to what we've seen from peers. So just talk to us about the three components you outlined there one what's unique of I appreciate you being hedging the balance sheet of a little bit more differently than some of the peers. So talk to us when we think about your margin one outlook on deposit margin both in the US and Canada and then is there something differentiating in

Speaker 9: With regards to your hedging strategy that should lead to more better margin resiliency relative to what we heard from peers. Thank you.

Speaker 6: Yeah, thank you Ibrahim for the question. Generally, we're very pleased with our margin and NII performance. It has been materializing according to the guidance that we provided and our expectations largely. We do emphasize stability of margins as we've said before and so as the environment changes and it has changed.

Speaker 6: it mutes the impact of that to margins. And so, you know, to backtrack for a second, we've grown our NII 10% year over year. We guided to stable NIMS across the overall bank in the first half of the year with some upwards momentum in the back half. And, you know, we still expect that. And that is because of our balance sheet.

Speaker 6: We know the factors that impact the balance sheet. We know how we're edging it. We're controlling the things that we can control. And on the margin, the deposit trends are the big ones, I would say, at this point that are a little bit different, both in Canada and the U.S. We're expecting more intense shift from non-interest bearing to interest bearing in term over the back half. But again, the impact of that, as I said in my remarks, is largely muted.

Speaker 6: because we are seeing strong margins and in some areas we've actually been able to pull some pricing levers in addition to hedging in the businesses in order to emphasize margins in the short term the deposit side. So just to give you a little bit more in each of those businesses so in the Canadian PNC side we benefit a few basis points a quarter from our hedging strategy and higher rates that

Speaker 6: in the US. So both US and Canada will benefit from rising rates coming into deposits. In Canada I think what you saw this quarter is the pressure from the asset margins we were seeing and that's largely from the mortgages. It moderated a bit and so the margin expansion deposits were being offset more in the past by mortgages.

Speaker 6: and we're seeing that subside a little bit. In the US, to cover the deposits in the US a little bit, we are still seeing the benefit from interest rates. There was several basis points positive from the interest rates this quarter, but that shift in mix and the decline in volumes in deposits more than offset that this quarter. Going forward, we're expecting deposits to be more stable.

Speaker 6: So that we will see as well revert. So net net in both businesses, I would expect some upwards momentum and what that will do at the total bank level towards the end of the year, we're still expecting single digits increase from last Q4 to this Q4. I'd probably peg it in the high 160s total bank ex trading.

Speaker 10: You know, I wonder about your liquidity coverage ratio. I've never asked about that, but it went down 10 points sequentially and you're now at the low end of the group. You know, is that where you wanna be? What would you need to see to maybe bring that back up or what was the motivation to bring it down?

Speaker 6: So first thing I'd start with is averages don't tell the story of quarters. And so this quarter's average versus last quarter's average sort of hides the path that we've been on. And I mentioned some of this in my remark, but just to give you a bit of the background, recalling Q1 we were talking about.

Speaker 6: higher liquidity levels than we would usually operate at. We like operating in the mid-20s in a normal, benign environment, mid-120s that is. And so we were working our way down. So where we ended the quarter and where we started the second quarter was not the mid-130s, which was last quarter's average.

Speaker 6: Then we face the disruption and we're actually very pleased and this I think shows the stability of our balance sheet. Even though we entered the quarter in the 120s, we had the disruption in the markets for a couple of weeks, a week of complete shutdown of the markets on the funding side and then slowly opening back up. We maintain the resilience and only a few points of LCR is what we dropped during that time and we were still well above that.

Speaker 6: we are at this point in time and as I said in my remarks in this environment we're probably going to keep it that way five to ten basis points higher than our normal operating level because of the risk in the environment and yes there'll be a cost to that and I reference that in my remarks as well in the corporate another segment

Speaker 6: we expect that $75 to $125 loss per quarter range, and part of that is higher cost of liquidity. We've already done the liquidity and the funding. The higher cost isn't fully reflected this quarter. It'll get reflected next quarter and beyond. Yeah, and Gabriel, just to add on to Viraj's comments, you know, the other thing that underpins all of that is cybersecurity around so that we actually haveanded a fund for a short period of time, and lay off on that on a good basis. Evolutionary most Coronaic current Nut entered into the pandemic all last Cost was quickly eliminated because to put them up at half a percent of mad

Speaker 5: We're staying close to our clients, we have exceptional client relationships, we're diversified across geographies and businesses, and all our channels are open. And they continue to see largely positive inflows from clients. The second thing is we have an exceptional treasury team. So the spot ended up much higher, as Raj noted, because we also watch our costs. When the markets open up, we're able to see what's going on. We're able to see what's going on. We're able to see what's going on. We're able to see what's going on. We're able to see what's going on. We're able to see what's going on. We're able to see what's happening.

Speaker 5: We fill up our tanks so we make sure we have the liquidity in place for the bank overall. It's a highly connected function between treasury and our client functions. We work really well together, which is why we're exceptionally pleased with how we ended the quarter. Thanks Victor, thanks for grabbing the mic there because my next question was for you.

Speaker 10: asked pretty regularly from investors, mostly in the US, about Canadian banks becoming more opportunistic on acquisitions in the US, given the depressed valuation, the disruption and all that stuff. And there are a few other banks that I would probably rule out at the moment because of various factors.

Speaker 10: CIBC, I would say maybe there's a possibility there. It's been a long time since your last acquisition, and that being the main reason. But you've been preaching more of the organic growth strategy in the U.S. for the past couple years. I'm just wondering if...

Speaker 10: if you've got any shift in mindset there at all with regards to M&A in the US.

Speaker 5: I think the disruption in the US banking market is in its early innings and when it's in its early innings you realize that the game will last nine innings. This is probably the third inning. So our focus continues to be on organic growth across our franchise. The last 12 months we've attracted over half a million clients in our Canadian franchise.

Speaker 5: through our personal bank and our direct financial services business. Our goal now, Gabriel, is we've made significant investments in our business. Our entire management team is shifting to harvesting those investments, making sure you can see the depth and richness of those client relationships both in the Canadian market and every business we operate in, including the U.S.

Speaker 5: Having said that, you keep your intent up and see how the baseball game evolves here. And like I said, I think we're in the early innings, so the most important thing is harvest our investments, continue to demonstrate operational resilience in periods of volatility, and deliver for your shareholders on a consistent basis, quarter after quarter. Maybe use the hockey analogy. Maybe use the hockey analogy too. We can use many different ways to make sure that we're doing the right thing.

Speaker 3: We'll talk later about sports analogies, but thank you for your questions. Thank you. Our following question is from Minnie Roman from Scotiabank. Please go ahead.

Speaker 5: Hi, good morning. I just wanted to dig a little bit deeper into differences between the Canadian and US office market and...

Speaker 5: So just better understand what accounts for those differences as you see them. How do you explain those differences? So maybe that's the first question there.

Speaker 7: Thank you for the question, Manny. I think most of it is indeed driven by differences in the market and how the markets are structured. That would relate to levels of recourse that you would see in those different markets and that would also be reflected in our lending portfolios.

Speaker 7: You would see if you particularly you go into office sector, you would see differences in the ownership structures between those two markets and again that would be reflected in our lending portfolios as well. I would say where you don't see a difference for us is in our underwriting and lending standards that we have very consistent across both markets.

Speaker 7: why we do expect the US office sector to remain somewhat elevated from an impaired perspective. We do not see any signs of stress in our Canadian book. What I was getting at was...

Speaker 4: One might think that there was just more of a timing difference rather than a more substantive difference in terms of when we'll see sort of some of the pressures that you're seeing the US come through to Canada, but I guess paraphrasing you, you're saying that that's not your view. So we have, as I said, we have taken a very proactive approach. We are through a bottoms up.

Speaker 7: loan by loan review of the files. I wouldn't attribute it to timing. One difference that I can call out, we do see a somewhat front loaded maturity profile in our US businesses. So far we have seen 24% of the entire office book renewing in the first half of the calendar year. We expect close to another 30% renewing in the second half of the calendar year.

Speaker 7: That is a little bit more, but then again, we have done a loan by loan review regardless of maturity profiles, and I wouldn't attribute it to timing. We do not foresee any major stress in our Canadian books.

Speaker 4: Thanks for that. And then just as a follow-up, I wanted to ask about the performing recovery in the Canadian personal business banking segment. It just stands out to me as a little odd so I wanted to understand it better, what's driving that. I wouldn't have expected to see that just given the kind of conservatism that we're talking about broadly, the bank's conservative posture here.

Speaker 7: So, if you could just help me understand that line in particular. Sure, Manny. I would say a lot of that is relative to our starting points. As you recall, we started increasing our performing allowances early last year with updates to our economic outlooks and specifically in...

Speaker 7: also driven by the resilience that we are actually seeing in our books and when I say well in line, it's actually coming in better than expected. If you look into delinquencies, if you look into impairments, if you look into losses that we are actually taking.

Speaker 7: A data point I would throw out is year over year, we still added 70 million in provisions on the performing side for retail. If you compare it to Q120, so pre-pandemic, our performing allowances are 60% higher still and continue to remain very, very comfortable.

Speaker 11: like the things you said, talked about the overall bank margin likely trending a little higher. And I think you gave us some, uh, like a nice clear explanation as to why, but I like to think about it about in the context of the increase in your LCR, uh, taking the LCR from say one 24 to one 34 or like the mid one thirties, one thirties, as you said.

Speaker 11: that does imply a lot of like a fairly meaningful increase in your high quality liquid assets, which sort of tells me that the bank has done a fair bit of funding in the wholesale market to support that LCR.

Speaker 11: So where I'm struggling is how do you get overall margin expansion with deposits, competition a lot higher, the shift to higher cost wholesale funding or higher wholesale funding costs, the increase in the LCR, how do you get to a higher margin in an environment where everything seems to be pushing in the other direction?

Speaker 6: Yeah, thanks Mario for the question. And so you are right, we were very active in the funding markets after the markets opened back up. And as Victor said, that in combination with our deposit franchise, both in terms of stability of balances, and frankly, as I referenced in my remarks, with the pricing discipline we've had.

Speaker 6: that helps the overall cost of liabilities actually stay fairly contained despite some of those mixed shifts. And we provided that extra disclosure on our balance sheet and the cost of liabilities and you'll see that. If you look at the demand category, I would say it's probably on the margin better than our model betas.

Speaker 6: is what we're seeing when you look at on the right side of slide 11 there. Our demand notice, the positive have gone from 20 to 93 basis points average cost. That dynamic will continue and so we do believe that that will help the bank and that's the few basis points a quarter upside momentum as I mentioned.

Speaker 6: The asset side, there's still some uncertainty on mortgages, margins keep moving around and so forth, but overall, we do anticipate a lot of that is behind us. And so net-net, that will contribute to the bank's increased margins going forward. And on the funding side particularly, yes, that's a lot of uncertainty.

Speaker 6: a significant amount of H. Crillay, but not that significant in the context of over $500 billion of client deposits of which about half is behaving with characteristics that are helping us on the pricing side. We feel pretty confident in that upwards momentum despite the shift. We do think the demand notice side is probably going to be more stable from here.

Speaker 6: versus some of what we've seen so far in the year because you know there's a lot of the incentive if you will that there was as yields went up and GICs and CDs had better opportunities for clients and interest bearing opportunities versus non-interest bearing that spread grew as interest rates went up

Speaker 6: that's starting to stabilize. And so we do think the mixed side will stabilize as well. And like I said in my remarks and Victor emphasized it, we've got a very strong deposit franchise. We've got broad relationships with these clients and that helps us on the pricing side. And we'll continue to emphasize our margins while doing what's right for our clients. Okay, let's flip over to commercial real estate. There is...

Speaker 11: I see the disclosure here that 58% of the exposure is investment grade. Of course, that means 42 is below investment grade. Can you talk about what proportion was investment grade, let's say a year ago, six months ago? How has that changed? Has it gone from investment grade like up 75% down to 50%?

Speaker 7: but it would also hold true for the entire business and government portfolio. We may have seen a number of downgrades as we talked about, we have seen a number of impairments, but on the balance and across all sectors that we are showing on the slide, the portfolio actually has remained very stable and...

Speaker 11: Yes, we have seen those downgrades. I wouldn't say that number has meaningfully changed. So it was still around that sort of 60% range of investment grade in commercial real estate about a year ago.

Speaker 5: Yeah Mario, if you actually look at the slides where we'd show commercial real estate in previous quarters, you'll see similar numbers. Okay, thank you.

Speaker 5: Mario, if you actually look at the slides where we'd show commercial real estate in previous quarters, you'll see similar numbers. Okay, thank you. Thank you.

Speaker 3: Our following question is from Lamar Persaud from Comac Securities. Please go ahead.

Speaker 11: Yeah, maybe sticking with Frank there. I appreciate the disclosure on the US office portfolio. So if we flip over that slide, maybe could you maybe talk to what the average LTV would be today if that portfolio was marked to market? Because it looks like the LTV given is out of origination.

Speaker 7: That's 60% I'm referring to.

Speaker 7: Assessing LTVs in the office sector specifically given how fluid it is, is a very hard task. At the moment there is not a lot of market comparables out there. Some of the market comparables you would look at are probably way too low in finding a bottom.

Speaker 7: As I said, we've taken a very proactive and prudent approach. We looked at LTVs from a cap rate perspective. What I would say is averages would be very misleading to give out here. It is a loan by loan and it is a file by file, asset by asset review. It's very hard to give you a precise number here. I would say it is very hard to give you a precise number here.

Speaker 5: Again, Lamar and all our sell-side analysts and investors, it's important to recognize a couple of things. One is our office sector loan portfolio consists of 2% of our overall loan portfolio at CIBC. dyno David

Speaker 5: half and half between Canada and the United States. It's all originated at 60% loan to value. We see what's happening in the market. You know, I would anchor it in the 25 to 30 basis point risk-impaired guidance that Frank has provided, so we feel comfortable where at. We recognize the volatility. We'll manage through it. We'll get through this. And I'm convinced that values are surfacing and investors will start showing up.

Speaker 5: to snap up these properties and people will start coming back to the office more. This is not going to be a steady state. Things will turn around and we will manage through this. Appreciate that. And maybe if I could try just a little bit differently and just probe a little deeper here. As I read more and more about commercial real estate and office specifically, the more I realise.

Speaker 11: It's actually based on the specific building itself. So I'm going to ask this very directly, Frank. Maybe you could provide some guidance on how you see losses evolving on this portfolio specifically. I appreciate the guidance on the 25 to 30 and potentially...

Speaker 7: towards the higher end of that range. But just specifically if you could just give me some color on that, that would be very helpful. Yeah, sure. And as you said, it is asset by asset and it is a very different answer for different assets that we are seeing. What I would say specifically, and as Victor said, specifically to the US sector, which is about 1% of our total loan portfolio.

Speaker 7: We should expect losses to remain elevated. They could be a little higher in the next coming quarters, but they will moderate over time in line with our maturity profile in early 2024. And that's specific to our U.S. portfolio. We are not seeing anything similar in our Canadian portfolios.

Speaker 8: Thank you.

Speaker 3: A following question is from…

Speaker 12: Please go ahead. Hi, good morning. Not to be the dead horse, but just wanted to square up on the US office exposure as well. And correct me if I'm wrong here, but I think some of the performing built from the US's quarter was due to the worst outlook.

Speaker 12: in the CRA sector specifically? And correct me if I'm wrong, but is there any way you could kind of give us a sense of what the allowances are backing that about, call it $4 billion of US office CRA? CRA, I appreciate the disclosure of the historical losses.

Speaker 7: We wanted to get a sense of how prudent or conservative the allowances were there. What I would say is a lot of the performing build, you would have seen this quarter is allocated to the US portfolio. A lot of the previous builds would also be allocated to the US office portfolio.

Speaker 7: At this point I cannot give you a precise number on the performing coverage that we have, but what I would say is we feel it is very prudent coverage at this point in time, we feel very comfortable with that coverage for what we expect on the portfolio.

Speaker 3: Thank you, that's it for me. Thank you. Our following question is from John Aiken from Barclays. Please go ahead.

Speaker 10: Good morning Victor, I wanted to dive in a little bit more about the move to an annual dividend increase. Was this something, is this a move that just gives you another six months of capital under your belt and is this something that was raised by the management team to the board or was this actually a board action? I hope you're hopefully not receiving your funds back.

Speaker 5: Our dividend actions are always recommended by the management team to the board. We're effectively just trying to simplify everything, John . So our yield is high, our target payout ratio is at the high end. The consistencies you should get from what we're going to do going forward, aside from the annual change, is that we will grow our dividends as earnings grow. Our plan is!!

Speaker 5: is to generate capital organically. We are able to do that, obviously. We're going to do that in the 10 to 15 basis point range, probably more like 10 over the short to medium term. We have our drip in place which generates about 10 basis points and we can always strategically reposition our balance sheet to free up more capital. As Haraj said, our goal at the end of the fourth quarter is to be north of 12%. We're very pleased.

Speaker 5: with the capital levels that we're at today, particularly given that we've settled all this litigation of the deep past and are working our way to north of 12 by the end of this year. Great, thanks Victor.

Speaker 5: particularly given that we've settled all this litigation of the deep past and are working our way to north of 12 by the end of this year. Great. Thanks, Victor. Thank you.

Speaker 13: Our following question is from Scott Chan from Cana continuity. Please go ahead. Oh, good morning. For John on the Canadian side, Walt in asset management, can you kind of qualitatively comment on the flows that you're seeing and how that is interconnected with the bank and then maybe more specifically.

Speaker 13: Can you comment on CIBC's high-interest ETF product now that Aussie is starting to look at it a bit more closely? Let me start with the flow question on the asset management side. The whole industry is in redemption, right?

Speaker 13: And we're number three, so we target number three or number two. That's what we'd like to be so

Speaker 13: good results, but we need more constructive markets to really show our stuff. On the Wood Gundy side, that's probably where the commercial wealth referrals work best, it's more high-end. That's working very well, our flows are good. Second best on record.

Speaker 13: Again, it's slower this year than last. There's less M&A in the commercial bank, so you're seeing less wealth flows overall.

Speaker 5: I'm also just going to add to John's comments. Our leadership team looks at two things. What does our money in profile look like? What does our money out profile look like? We seek to compete, obviously, with the peer group that we're competing against day after day, but also manage margins. The shift that we've seen under John's leadership is to shift to both competing, but also managing margins so that we can expand margins.

Speaker 5: call with a financial planner, do a digital financial plan and invest with e-documentation within a very short period of time for our clients, taking the friction out of investing with the bank. In terms of our deposit products, our checking accounts are really well positioned in terms of pricing in the marketplace.

Speaker 5: We did really well in terms of term deposit market share growth early last year and we're pleased with that. So we're not chasing a trend. We identified the trend and did the right thing for our clients and our direct financial services platform simply is well positioned to get those clients, especially students and newcomers.

Speaker 13: where we've seen a robust growth in our market share and our market position to further grow deposits. Okay, thank you very much. Thank you. Our following question is from Nigel DeSouza from Veritas Investment Research. Please go ahead. Thank you, good morning. I took a quick follow-up question for you. The first was on…

Speaker 12: the PCL reversal in Canadian banking this quarter. I was just trying to get a sense of the rationale behind it because...

Speaker 12: How many of the pandemic you have substantial excess allowances and you apply that management overlay to retain those allowances despite an improving macroeconomic outlook? And now we're in a more challenging environment perhaps on the precipice of recession. Why not apply that management overlay again and retain those allowances instead of releasing them into earnings? Yeah, and thank you Nigel for the question. I mean ultimately GDP and unemployment.

Speaker 12: Okay, and then my second question, when I look at the FDIC bid summary for Silicon Valley Bank, it looks like CIBC did put a bid in there. Is that right? And Victor mentioned that it's early innings, but it looks like they took a swing on the first bid, so just trying to understand the rationale behind that bid. And Nigel and Sean, thanks for the question. Look, as Victor said, we always have our antenna up. We watch for...

Speaker 5: what kind of developments are going on in the market and so to the extent we see opportunity that aligns with our strategy we'll certainly look at those opportunities. Did you bid on any comment on the business which is the wealth business or? Nigel we're not going to comment on anything specifically like we keep our intent up anything that we do has got to be a creator of the capital in a short period of time.

Speaker 13: Our following question is from Saurabh Movahedi from BMO Capital Markets. Please go ahead. Okay. I just wanted to see if maybe a little bit early to do this, but I wanted to see if we could look beyond the next couple of quarters. You know, Victor, Parash, I mean, I think you guys have talked about it being a bit of a challenging operating environment. Maybe reserves are going to have to go up, maybe red music.

Speaker 5: Saurabh, my colleagues can chime in as they see fit. There's a couple of things I'd note and stress once again. Last year, we saw some robust growth at our bank and a lot of it was tied to the investments that we were making across our franchise. And we've always said, and we've always guided that once that economic environment starts to shift.

Speaker 5: we're going to shift our investment posture. We're going to take our expense growth down to a more normalized level. So I think that from a revenue standpoint, you're going to see a world of normalization when it comes to NIMS. You're going to see a world of normalization when it comes to volumes. From an expense standpoint, you're going to see the CIBC team continue to deliver expenses in the mid-single digit range and continue to be relatively flat sequentially over the short term.

Speaker 5: as we work through this economic environment and harvest the investments that we've made. I think from a provisioning standpoint, Frank's been very clear in terms of what our stance is. So this environment is normalizing, and we are well prepared to deal with that normalizing environment. We've built the franchise that we have today purposefully.

Speaker 13: with the client base that we have and the client base that's growing in a world that's normalizing. So that, in general, is how I see ourselves positioned. And no need – I mean, just for crystal clarity, it's going to be a tough revenue environment. You're not going to be adjusting your risk appetite necessarily more aggressive or more conservative. Is that a fair statement? Yes.

Speaker 6: Yes, Sarab, I'll jump in. I think on the risk appetite that's a fair statement and in terms of appetite on the investment side as well, I don't think we need to adjust beyond what Victor said. We do understand that the environment's normalizing cost of credit will go up, revenues may slow down, we're controlling the things we can control, we've shown you what we're doing with expenses and the only thing I would ask you is to look at the

Speaker 6: of plan and what we've done is we don't want to get there on our expenses by not investing in the business. That's why I said in my remarks we're continuing to invest at a steady level, we're focusing that investment in key areas where we have a good return so we're making some trade-offs and on the flip side we're trying to take out expenses and you see our disclosure on that work.

Speaker 5: you're seeing our leadership team those who spoke on the call today and those who are around the table this morning is delivering solid results we deliver them this quarter we plan on doing that going forward we're going to control we can control by being highly disciplined in both our capital allocation and how we manage our expenses while still investing as Arash just said now in strategic areas for future growth

Speaker 5: CIBC is a resilient, well-diversified business model. We're well positioned in this current challenging environment, with a strong balance sheet that can withstand any potential short-term headwinds. We're also executing on our strategic priorities. We're leveraging our market advantages to deliver more for our clients, and we're bringing more clients to our platform. We're managing CIBC with thoughtfulness and with agility to optimize margins.

Speaker 5: and to optimize efficiency during this very unique period and maintain an unwavering focus on creating value for all of you, our investors. I want to thank our CIBC team for their continued dedication to helping our clients realize their ambitions day in and day out. Their collective efforts are really essential to building the resilient, relationship-oriented bank we have today. And again, I want to thank you all for your continued support.

Speaker 5: your insightful questions and we hope that we answered all of them to your satisfaction and look forward to seeing you next quarter and speaking between now and then. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.