Q3 2023 Canadian Imperial Bank of Commerce Earnings Call
All participants please standby your conference is ready to begin <unk>.
Good morning, welcome to the CIBC quarterly financial results call.
Please be advised that this call is being recorded.
I'd now like to during the meeting over to Geoff Weiss.
His VP Investor Relations. Please go ahead Jeff.
Thank you and good morning.
I'll begin this morning's presentation with opening remarks from Victor <unk>, Our President and Chief Executive Officer, followed by Roger <unk>, Our Chief Financial Officer, and Frank <unk>, Our Chief Risk Officer also on the call today are a number of our group heads, including Shawn Beber U S region, Harry Culham capital markets in direct financial services.
And Jonathan Thomas Canadian banking.
All available to take questions following the prepared remarks.
On slide two of our Investor presentation, our comments may contain forward looking statements, which involve assumptions and haven't.
Current risks and uncertainties actual results may differ materially with that I will now turn the call over to Victor.
Thank you, Jeff and good morning, everyone I hope you've all had a nice summer.
With a few brief comments about our third quarter results, including progress updates against our strategic priorities. I'll, then turn the call over to Raj followed by Frank to review our performance in greater detail before we take your questions.
This quarter, we delivered solid core business performance by continuing to execute on our client focused strategy while building capital.
Expanding margins and prudently managing expenses.
Net earnings of $1 5 billion or $1 52 per share were lower than the prior year.
And reflect higher provisions for credit losses, while pre provision pretax earnings were up 5% during the same period.
If you were to change due to changes to our forward looking economic indicators as well as the continuing normalization of credit conditions, we increased provisions in our consumer lending portfolios.
The increased provisions in the commercial segment, mainly relate to our U S office office portfolio, which represents less than 1% of our overall loan book.
We have a robust balance sheet ending the quarter with a CET one ratio of 12, 2%.
Going forward, we're focused on continuing to build our capital levels to ensure that we remain well positioned for any changes as well as for any opportunities.
We remain focused on three key strategic priorities.
Our high growth high touch segments, including our Imperial service platform and North American private wealth franchise.
Focusing on our future Differentiators, which includes delivering leading digital banking solutions to Canadian consumers.
And enabling and simplifying our bank.
Now let me give you a few highlights on our progress.
Our Canadian consumer franchise continues to experience robust growth over the last 12 months. We've added over 650000 net new clients to CIBC, which includes 165000 clients and are simply franchise.
We also continue to make good progress on our strategic focus to deepen high touch high gross relationships in the affluent segment.
Imperial service, our unique advice based relationship offer for a mass affluent clients self funds managed growth of $14 billion year to date, driven by successful client acquisition as well as our focus on ensuring clients are and the write off or do you get the advice and solutions they need from CIBC.
Imperial service is an important and differentiated asset for CIBC.
We recently appointed a dedicated leadership to directly oversee this key business platform and we expect to see further momentum in this business.
We're also focused on delivering leading digital banking solutions.
We recently earned the number one ranking in customer satisfaction for mobile banking apps in Canada from J D power.
<unk> continued to see increasing client engagement in our digital channels.
32% of our core retail products were sold digitally and our digital adoption rate has increased to 84%.
Looking at our North American commercial banking and wealth management businesses higher volumes and organic client acquisition drove topline growth in commercial banking this quarter.
Although the pace has moderated from a peak level of peak levels a year ago.
As expected demand for loans as cool as business owners, taking a more conservative approach to borrowing at a higher rate environment and slower economy.
In wealth management, our top ranked advisers continue to provide high quality advice to help our clients achieve their ambitions are high touch personalized advice model supplemented by digital tools supported a AUM growth this quarter with positive net flows on both sides of the border in our private wealth business. We also continue to benefit from referral activity driven.
Our focus on connectivity throughout our bank.
In capital markets, our well diversified business model and highly connected team across our bank delivered another solid growth quarter, driven by strong performance in our global markets business.
Our strategic focus on our sustainability renewables and energy transition franchise was also recognized by global Finance is the best investment Bank in Canada.
And for outstanding leadership in sustainable infrastructure finance.
We also continue to invest in optimizing our technology infrastructure and processes to enhance productivity.
This includes leveraging the cloud to drive scale and speed to market as well as the automation of manual processes to reduce costs and improve cycle time and accuracy. Our efforts have resulted in significant cost savings. So far this year and are having a positive client impact with a 40% improvement in our client net promoter scores compared to last year.
So in closing we have a deep and experienced leadership team to make strategic decisions that position us for success, even in the face of challenging conditions.
As we laid out on our prior calls we have a clear momentum in the segments, we've identified as strategic growth areas for our bank and we'll continue to focus on them.
We've moderated our expense growth to the mid single digits, while realizing them best are the benefits of the investments we've made heading into the into this fiscal year.
We've continued to build our capital.
And we've driven improved margins across our bank.
Our business momentum, coupled with prudent risk management, and our strong capital position offers us the flexibility to have definitely not navigate changing market conditions adjusting our investments as needed throughout the economic cycle.
Now before I turn the call over to Raj I'd like to extend our care and concern for those affected by the devastating wildfires in British Columbia in the northwest territories.
Making available financial relief advice and support to affected clients, including donations to CIBC foundations relief funds for the two provinces. Our thoughts are with you all as you begin the process of recovering and rebuilding and with that let me turn the call over to Raj.
Thanks, Victor and good morning, all thank you for joining us late in earning season.
I'll start my remarks on slide seven this quarter's results reflect the strength of our client franchise as well as team CIBC the ability to proactively manage through a dynamic operating environment. We will continue leaning on these differentiators to sustainably deliver value to our stakeholders improve.
Improving margins solid trading results and disciplined expense management allowed us to maintain revenue growth momentum deliver peer leading operating leverage and continue to drive strong organic pre provision earnings growth. This helped to partially offset higher credit provisions and a higher share count to deliver diluted earnings per share of $1 four.
<unk> seven for the quarter.
Excluding items of note adjusted EPS was $1 52, and our ROE was 11, 9%.
We also continued to strengthen our balance sheet, ending the quarter with capital and liquidity ratios well in excess of current regulatory requirements.
The balance of my presentation will refer to adjusted results, which exclude items of note starting with slide eight.
Adjusted net income of $1 5 billion was down 15% from the prior year driven by an increase in credit provisions, which Frank will discuss in more detail.
Revenues of $5 9 billion were up 6% year over year benefiting from strong P&C margins balance sheet growth and client trading activity expenses were also up 6% from the prior year as inflationary pressures moderate and we continue to focus on both expense discipline and strategic investment.
As a result pre provision pretax earnings of $2 6 billion increased 5% over the prior year.
Slide nine and 10 highlight the trends driving our net interest income excluding trading NII was up 8% over the year due to continued balance sheet growth and a disciplined margin management approach, which prioritizes stability and long term performance total bank NIM, excluding trading was up two basis points sequentially benefiting from strong.
Margin expansion in our P&C businesses.
Robust Canadian P&C NIM of 267 basis points reflects the high quality of our Canadian franchise, NIM was up 10 basis points sequentially, including help from nonrecurring items. Excluding this the key driver was deposit margin expansion in the quarter supported by higher rates, which more than offset moderating.
Sure on mortgage margins.
We provided incremental disclosure on the factors impacting P&C margin in the appendix.
Let me now our U S segment was 400 346 basis points up 10 basis points year over year and five basis points from the prior quarter.
Sequential increase was largely due to higher deposit margins and interest income on our recovery, partially offset by lower asset margins and prepayments net.
Net of the one time benefits I just referenced we expect both Canadian P&C and U S segment margins to remain relatively stable in the near term and we maintain our recent guidance of 165 to 170 basis points for overall bank margin.
Moving on to slide 10 loan balances averaged 537 billion this quarter, an increase of 5% from the prior year supported by all businesses.
Growth in our high quality deposit franchise outpaced loans, increasing 6% from the prior year with an underlying stabilization of the recent mix shift from notice in demand products that term product.
We continue to be focused on growing our balance sheet prudently and profitably with an emphasis on stable client deposits and lending focused on priority clients with strong returns.
Turning to slide 11, noninterest income of $2 6 billion was up 13% from the prior year supported by growth in trading income and higher transaction related fees.
Market related fees, excluding trading increased 1% year over year, a stronger underwriting and advisory and investment management and custodial revenues were largely offset by lower revenue from ancillary investments in treasury activities.
Turning to slide 12 expense growth continued to slow in line with our guidance, increasing 6% from a year ago, as we proactively pace steady strategic investments and emphasize efficiency against the backdrop of slowing revenue growth on.
On a sequential basis expenses were up 2% with more than half of the growth, resulting from the impact of more days in the quarter.
Our balanced approach has allowed us to revert to positive operating leverage.
And deliver a solid nix ratio of 55% this quarter.
We continue to manage to mid single digit expense growth for the full fiscal year 2023, and we will continue to target positive operating leverage over the medium term.
On to slide 13 to discuss our balance sheet. Another area that has benefited from our focus on disciplined resource allocation and efficiency.
Our CET one ratio improved from 11.9 to 12, 2% sequentially, primarily driven by organic capital generation and share issuance against relatively stable our WAM, excluding the impact of currency fluctuations. We will continue to be disciplined on capital deployment and expect our CET one ratio to continue trending.
Higher.
Our liquidity position remained well above regulatory requirements throughout the quarter, resulting in sequentially higher average LCR of 131%.
While we remain cautious in the face of economic uncertainty, our strong balance sheet positions us well to accelerate growth when the economic outlook improves.
Starting on slide 14, we highlight our strategic business unit results net income in Canadian personal and business banking was $527 million down 17% from the same quarter last year due to a higher provision for credit losses.
Pre provision pretax earnings were up 8% from the prior year and 14% sequentially, reflecting strong growth as a result of our focused strategy.
Revenues of $2 4 billion were up 6% year over year helped by a robust margin expansion and volume growth on a sequential basis revenue was up 7% driven by the same factors as well as additional days in the quarter.
Expenses of $1 3 billion were up 4% from the same period last year, resulting in 2% positive operating leverage.
Moving on slide 15, net income for our Canadian commercial banking and wealth management was 467 million.
Revenues of 1 billion 350 were up 1% from a year ago benefiting from 6% loan growth and 8% deposit growth in commercial banking, partly offset by a decline in wealth management revenue.
<unk> increased 1% from a year ago and operating leverage was neutral.
Well wealth management revenues have been impacted by markets. This quarter highlights the quality of our Canadian P&C banking franchise, where we delivered pre provision pretax earnings growth of 8% from the prior year supported by strong margin performance and over 2% operating leverage and while we've been selective recently in commercial.
Loan growth, we have the ability to accelerate support for existing and new clients as the environment improves to provide further momentum to our domestic P&C growth.
We've included slides for the P&C segment in the appendix to this presentation.
Net income of $62 million U S and U S commercial banking and wealth management was down 62% from the prior year due to higher credit provisions largely in our office portfolio.
Revenues were up 5% over the same period, driven by a 10% increase in net interest income partially offset by a 5% decline in fees that are impacted by market conditions.
NII benefited from 7% loan growth and strong net interest margins, while average deposits decreased 4% sequentially outflow and remixing trends stabilize through the quarter.
Expenses were stable year over year, resulting in positive.
Operating leverage of over 5% and we expect more moderate expense growth going forward as compared to the recent past.
We maintain focused on balanced and profitable growth to scale, our U S business and our uniquely differentiated franchise is well positioned to meet client needs as the local competitive environment evolves.
Turning to slide 17, our capital markets business net income of $494 million was up 11% year over year revenues of $1 4 billion were up 13% over the prior year driven by our differentiated capabilities highlights. This quarter include 18% growth in global markets and continued double digit.
Growth in direct financial services, which grew 26% largely due to margin expansion and simply.
We also saw increased activity in underwriting and advisory and continued growth in corporate banking.
Selecting the capital market's seasonality we've seen in recent years, we expect Q4 revenues to be lower sequentially. In this segment with growth reverting to mid to high single digits over the prior year.
Expenses of $673 million were up 13% compared to the prior year largely due to investments in key growth initiatives undertaken in late 'twenty two.
We anticipate sequential expense growth to continue moderating.
Slide 18 reflects the results of the corporate and other business unit net loss of $98 million compared with a net loss of $50 million in the prior year largely due to less favorable treasury revenue and higher corporate expenses, partly offset by higher revenues from international banking, we continue to maintain our medium term guidance of 75 to one.
Hundred and 25 million quarterly loss in this segment.
In summary, we delivered another quarter of steady profitable franchise growth as a result of our agility and an unwavering focus on our differentiated strategy, our strong margins moderating expense growth and disciplined approach to resource allocation give us significant flexibility to respond to changes in the environment and to seize on.
Opportunities that present themselves, we will continue to manage proactively through a fluid environment to support our clients maintain our balance sheet strength.
And emphasize profitability with that let me turn the call over to Frank Thank.
Thank you Raj and good morning, everyone.
This quarter overall, our portfolio performed within our expectations.
We saw a built in performing allowances this quarter, reflecting a prudent outlook based on the macroeconomic environment.
Our impaired loans continued to normalize and remained within expectations.
We saw sustained headwinds in the U S office sector. However, our exposure remains relatively small at less than 1% of our total loan portfolio and our experienced real estate team is managing the portfolio on a loan by loan basis working closely with our clients.
Our other portfolios continue to perform well with demonstrated resilience in the Canadian consumer lending portfolio.
Turning to slide 22, our total provision for credit losses was $736 million in Q3 compared to 438 million last quarter.
Total allowance coverage increased from 66 basis points in Q2 to 73 basis points this quarter.
The 258 million performing provision this quarter 211, or 80% are driven by changes to our forward looking indicators with remaining due to portfolio growth credit migration and other movements.
So bill this quarter was primarily a result of higher debt service ratio forecast for the consumer books.
After nearly 18 months if rate hikes are forecast expect servicing pressures of higher interest rates and rising on the rising unemployment.
Provisions on impaired loans was $478 million up 99 million quarter over quarter.
This increase was driven by our U S commercial portfolio, the bulk of which was attributable to our office commercial real estate exposure.
We also experienced higher impaired losses in our retail portfolio.
For all our impaired losses countries continue to perform within our expectations.
Slide 23 summarizes our gross impaired loan formations overall balances were up in Q3, mainly driven by business and government loans.
New formations were also up in Q3 were try 415 million is related to our U S office exposure.
Slide 24 outlines the net write off of a 90 day 90, plus day delinquency rates of our Canadian consumer portfolios, which overall continues to remain stable this quarter and in line with our expectations.
Muni Kate in prior quarters, we expect write offs and delinquencies to continue to revert towards pre pandemic levels.
Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio, which makes up 54% of our total loan balances.
Overall late stage delinquencies remain low, especially when compared with pre pandemic levels.
Variable rate mortgages account for one third of our mortgage book.
Continue to display strong credit quality and performance.
As a result of the interest rate hikes. This past quarter. The portion of non amortizing variable rate mortgages has increased to 50 billion up from 44 billion last quarter.
We continued our proactive client outreach and see good responses with around 8000 clients, increasing their monthly payments and just over 1000 clients, making lump sum payments removing themselves from the negative negative amortization status.
We will continue to work closely with our clients through high interest rate environment and other market developments.
Slide 26, we provide further disclosure on our U S office exposure.
I mentioned this represents less than 1% of our total loan book given.
Given the effect of headwinds, we increased our allowance coverage from 421% to seven 6% quarter over quarter.
While our maturity profile is weighted more towards fiscal 'twenty, three and 'twenty four we've already seen $1.5 billion in net outstandings being renewed reduced or paid out over the past few quarters.
We worked through the balance of maturities, we expect to see losses in and around the current levels for the portfolio for the next few quarters, which is consistent with what we noted last quarter.
I want to close by noting that our overall credit quality and coverage remains robust given.
Given the economic headwinds and sustained pressures in the U S office space, we expect our fiscal 'twenty free loan losses unimpaired to be at the high end of our guidance of 25 to 30 basis points for impaired losses.
We believe our additional provisions this quarter continued to provide prudent coverage for market conditions that will evolve.
I will now turn the call back to the operator.
Thank you Frank Please press star one at this time, if you have a question or your first question is from Ebrahim <unk> with Bank of America. Please go ahead.
Hey, good morning.
I guess maybe.
A question for Frank starting with you on just the performing PCL is clear.
Clear, what you said, but as we think about you mentioned I think 80% of the base. This quarter was a forward looking indicators.
And what I'm trying to understand how much of that is just the model output versus your expectation around the macro and how that divorce. So talk to us fundamentally how you see credit playing out in the consumer book, if we need to stay higher for longer I'm, assuming obese keeps us on the unemployment to go up higher.
The consumable where do you see the last gave us and just how quickly things you can do it.
Yeah.
Couple of things to try and pick their so what I would say is it.
It is driven by our model outcomes. It is driven by all forward looking expectations as as I said by by about 80% of the overall performing build.
What we saw this quarter is a higher interest rate expectation, we saw two rate hikes in the market one of which I would say it was a not necessarily widely expected and we see that playing out in debt service ratios that have any impact on all of our consumer lending product.
Probably the biggest one I'm playing out in in our unsecured personal books and again those are forward looking expectations. What I would also say if there was a forward looking expectations for the next couple of years and I don't want to get too technical but I first mine in stage two is asking for a lifetime.
Losses be average lifetime, and our consumer lending books is a couple of years. So what we see is the bill. This quarter is certainly a reflection of what we would expect to play a fee to play out over a couple of years. So it's not an imminent change in our outlook is little changed over those couple of years.
And I think what I would say is if you ask for it is playing out in the unsecured books, where we do see strength, but we see that stress playing out as indicated as new normalization off net write offs that we expected that we are seeing playing out the other point I will make on performing allowances overall.
As a.
Large increase this quarter, if you normalize that over the last couple of quarters. If you normalize it year over year. It is certainly something that is not unexpected it is prudent to increase our coverage ratios this quarter and that's what we've seen play out.
Understood and maybe one question just because Oh. This is the first time things are some of the articles around the mortgage underwriting. So it's just in the past maybe Victor for you I mean, I think you've spent a lot of things under your leadership.
Culturally turning it on things Etsy at Commerce from a risk management standpoint.
To the extent not to make too much out of what was out there in the past, but give us your sense. Both in terms of that is clean look at the bank.
To the extent you can discuss that in also.
It's really in terms of leadership in terms of like what should we need from the outside when do you see some of these leaks are coming through and making their way to the past how should we interpret that good morning, you know ebrahim and thank you for your question. So let me just first of all say that our regulators play an incredibly important role in ensuring strength and stability in the financial system.
Canada, and I think they've done that.
Over a century and a half and they do it well. So as you can appreciate I can't comment on the specific regulatory matters.
Can tell you that we maintain an ongoing transparent engagement with all of our regulators in all of the jurisdictions that we operate and with our board. We've also got effective controls to ensure compliance with supervisory expectations and we continue to manage all of our businesses, including our mortgage business prudently and with a client for.
So what I will say about articles like that it's just disappointing to see when things are being reported publicly they presented in a way that's simply does not reflect the way we actually operate there's always going to be a healthy tension in running a large complex business, but I can tell you. This we've got strong governance, we got an incredibly strong culture.
We got really strong employee engagement scores and a team that cares about how we build our business going forward and that as investors you need to know and we're happy to engage with you on anything that's on your mind to the extent that we can but I can tell you we run it well we run it prudently we run it with good governance and we run it very transparently.
Yeah.
Got it thanks, Victor Thanks for taking my questions. Thanks, Ebrahim and have a good day.
Thank you. Our next question is from Kimberly on the Shane with National Bank Financial. Please go ahead.
Good morning, a couple of questions here. Thanks.
Thanks for the <unk>.
Margin guidance Raj and I'm wondering you know if this could be like a.
Maybe some bouncing around could use that term.
The U S. In particular I'm thinking about the impact it might have because deposits are down quite a bit sequentially, but may require us to use more of it shall be deposits or wholesale.
Wholesale funding and.
And how does that play into your outlook then that's an issue.
Yeah. Thank you. Thank you for the question Gabe like I think everything is playing out in terms of margins as we had guided right and as I said in my remarks, we have strong franchises both in the U S and Canada and that plays into it you've got a strong deposit franchise in the U S. We've got a strong strategy that folks.
Is it on the right clients and for our focus on profitability and we have a strong a L. M framework, we've talked about this before we manage the U S balance sheet. The same way, we do the parent balance sheet, where we stabilize.
For rate fluctuations and we manage for overall margin stability over time, and so that's really what you're starting to see play out when you have a rate cycle like the one we did and this applies to broader than the U S. Right rates went up.
Very quickly and intensely and so that plays out a bit different upfronts, because you did see quite a bit of fluctuation in noninterest deposits going to interest bearing warranted.
And that actually did not allow as much margin expansion as you would have otherwise expected and what you would compute from doing our interest rate sensitivity calculations based on the disclosures and so that was muting a little bit the results and margins in all the businesses, including the U S. But that has stabilized and I think that goes to the stability of the client franchise.
And Sean can speak to more details, but we did see the demand deposits in the noninterest deposits.
Stabilized this quarter, we saw that mix shift stabilize so I don't expect us to need any funding that will lead to higher costs. So as you alluded to and so we go back to our guidance with respect to the U S. There was a little bit of one time noise as I mentioned in my remarks, we had a recovery on a loan in the interest on that recovery comes into NII.
Just for that a couple of basis points, but outside of that I would expect stable to a slight upward momentum in the U S from here.
Okay and my next question is on the capital are no very little R. W. A inflation this quarter.
And I think a very little last quarter as well I'm wondering how close are you to you know the output floor and especially if we look at the Q1 'twenty four.
You know could we trigger that and see a little RW inflation.
And then I guess also it might as well I mentioned the fundamental review of the trading book and that's the context.
There.
Yeah. Thanks, Gabe let me, let me comment on our capital more broadly and I address your questions again, we've been very clear about our goals on capital and how we are managing to it and what we've guided to in terms of forecast frankly, we're ahead of that we're ahead of schedule and we're very pleased with that so let me remind you of how we look at capital we look at our cash.
It'll levels with respect to.
Where regulatory requirements are where our own needs are and we like having a bit of capital for flexibility are well above those regulatory requirements.
When you look at the peer group and so forth and so with all of that as we looked at the environment, we managed to try to get to above 12% at the end of this year. As we said we're ahead of schedule I think into the mid <unk> is what we're forecasting at this point that we would like to get to getting into the next year and.
And we are very well positioned to do that how we've been doing that we've been prudent with how we're allocating our balance sheet and as I mentioned in my remarks right. The balance sheet is important our aro is extremely important to us costs have gone up cost of capital is up our WMA requirements are up capital requirements are up and so all of that is reflected when we.
We deploy capital to support our clients and so we're not necessarily conserving capital, but we're prudently allocating our capital where we are now we can continue growing our business I don't see constraints on our ability to grow our business to still getting to that goal of mid 12% over the next few quarters here.
And from a regulatory perspective, I would guide you to net all the impacts that are coming at US. The next few quarters, a net slight positive from all the changes, including where we're working on our U S. Transitioning to the advanced approach, which will be a positive once it comes in net of everything else in that.
And that slight positive is what I would expect so.
Maybe a dip but then I mean these are my words, but just trying to visualize you might see a dip early in 2024.
And if you could touch upon those two items I ask.
And then after after the conversion of our ERP in the U S.
There's a few things there gave I think you've got a you've got the C V. A R. T be changes you've got the change related to the negative amortization mortgages coming.
You've got the floor is obviously with which was not a factor for us at this point in time.
And then you've got the U S. Frankly, the timing of the rate changes as you know the timing of the U S going to advanced is not known and so depending on how that comes in you know you could have a little bit of up and then a down you could have net neutralizing in the same quarters, you could have a little bit of a dip and then going up a bit.
Let's see.
Thanks, a lot and enjoy labor day weekend.
Thanks.
Thank you.
Our next question is from many women with Scotiabank. Please go ahead.
Hi, Good morning, I wanted to go back to a credit and a follow up on something you Dream was talking about just in terms of the volatility of your PCL line, especially the performing the AR bucket and an especially Canadian.
Personal and business banking, the performing line and I'm definitely seeing quite a bounce around quarter to quarter from recovery to 279 million build up this quarter and I'm just wondering.
How should investors interpret that and is there anything you can do to temper that kind of volatility. If there's anything you want to do to temper that kind of volatility.
So so great question. So how do we look at it one we look at coverage ratios. We look at how we are building coverage ratios over time, and we think given the macro economic uncertainty that is a prudent approach to take.
You're absolutely right in and I mentioned that a little bit we had a.
Slightly more optimistic outlook last quarter that drove a relief in particular as it related to interest rates, where they would peak and how long they would see at that peak there was a little bit more optimistic that has reversed we we we do not like to feed that volatile.
But part of yard for nine days you have to incorporate those forward looking indicators and you have to.
Run those outcomes. If you can imagine it is very tightly governing process, we have lots of discussions around back we look at those drivers we look at the hour.
It comes off those drivers and again in particular this quarter I would I would stress it is prudent to take that economic uncertainty into account and to to reflect that in our provisions.
Other thing I would stress is pointing back to our actual credit resolved Canadian consumer book is holding up very strong we see impaired losses, normalizing, but we see them normalizing well within our expectations and again Ben It is a little bit of a question of how that plays out and there was whether you put.
And you're probably asking about it well I mean that is the uncertainty ahead of us, but everything we are seeing is pointing towards a very strong credit quality quite a good resilience in the Canadian consumer books and again, if you look at delinquency rates. If you don't get an impairment rates and so on we are we are pleased with that.
Again, it's because it is performing better than our expectations.
And maybe if I could just.
Build on Frank's comments, but also take a step back you know I think it's really important to focus on the earnings fundamentals of the core bank.
This quarter, which represent you know client growth very robust client growth translating to revenue growth.
Margin expansion, which suggests that not only are we you know conscious of our margins and where we want to take them, but we're also pricing business appropriately with a client and shareholder lens in mind pre provision earnings that are at the top end of the peer group in terms of year over year growth.
Expense management that we were way ahead of the curve in terms of getting that expense management. Our investments have been made last year. The year before so we are in a good place now and we will continue to manage those expenses to a good place when it comes to credit I think Franks set at all I think on a year to date basis, when you compare our provisioning on the performing.
Side, we're very much in line with our peer group when you factor in mix differentials across businesses. So fundamentally.
I feel like our business is in a very good place we don't like the volatility in the models will work toward looking at variables that are more predictive as we go forward because we understand that our investors want consistency and believe me we wanted to deliver that consistency as well. So fundamentally we're delivering it will continue to deliver it going forward across all aspects.
Of our P&L.
Thank you Victor.
Thank you.
Our next question is from Mike.
With a K B W. Research. Please go ahead.
Hi, Good morning, just a quick question for Raj on the noninterest bearing deposits I think sequentially last quarter.
The outflows sort of Flatlined.
And now it's sort of picked up on I'm guessing, it's because of the the two rate hikes, we had during the quarter.
And I'm wondering in your margin guidance or just your outlook overall, what do you what do you see on the N B run off rates do stay higher for longer and let's say, we don't get any rate relief until maybe mid 2024, how do you see that and I be run off trajectory from here.
Good morning, Mike. Thanks for the question Yeah look it's a it's a very good question right as I as I mentioned, we've gone through a cycle that we haven't seen before in terms of the speed of rate rises and so I don't think anybody can predict exactly where we go from here.
But what we are definitely seeing and the trends is a stabilization and so if you look at this year, we've had tremendous growth in term product in interest bearing products and it did come partly at the expense of a reduction in our overall demand deposit balances and we've seen on a year over year basis.
Demand deposits will be down and they'll they'll be down a substantial percentage over the last little while if you go from the beginning of the rate cycle to now we've seen about a 10% shift but that is stabilizing you're right. This quarter. We did see a few billion dollar with accident reduction in demand deposits, but it's a lot more stay.
But then what we've seen over the prior quarters.
And we're seeing that in the U S as well as in the Canadian franchise, and so if rates stay where they are down I think we will continue to see this stability play out if rates go further you could see a little bit further fluctuation right. If you look at it on a historical basis, we were actually starting to converge on the mix.
If term to non term products that we've typically had over the last several years and even if you go back to prior areas of very high rates are we're starting to get to within that range. So if there is more remixing to go at.
It would be more muted and less than the 10% or so that we've seen so far but I think it does stabilize around here okay.
Okay. That's very helpful and just a quick follow up so in a scenario where rates are in fact declining let let's just pick a mid 2024.
Sort of I'm talking point.
Is it fair to assume that you don't see this number start to re fleet like you'd have to is it fair to say that you'd have to have a significant drop in rates before you could potentially get a better mix here. It does it sort of just stabilize and stays roughly at those levels, what I'm, what I'm sort of getting up yeah. I think that's right, Mike right and I think again at the speed It makes a big difference.
Right. If you go back to our interest rate sensitivity disclosures, which assume a static balance sheet that hasnt played out the cycle on the way up right. We had a tremendous increase in rates, but very quickly and what you actually saw as more than half of that the big driver that is netted off interest rate increase benefits, we would've otherwise had on our margins.
Has it been this deposit remixing more than half of the benefit you would've gotten has eroded away through this remixing now on the way back down I think it all depends right. It depends again at the speed at which it happens and when it happens and how the markets are and therefore, a little money flow to the markets will it flow to to demand accounts et cetera, So lots of factors to consider.
But I think your assumption is right as a base case as it probably stays more stable for a while if it's a gradual decrease.
Okay. That's very helpful. Thank you for the color.
Thank you.
Question, if some of them are Prasad with Comex Securities. Please go ahead.
Yeah. Thanks.
Frank.
On the U S. Oh over here I appreciate the seven 6% our ECL.
The coverage ratio increased from four 1% last quarter can you talk to us about how you see that number evolving like is the point that you think like we're done Delta here, just given a strong copper.
Coverage ratio and significant maturities through the end of the year or do you see the risk of future material bills like perhaps that seven 6% could go to north of 10.
How should we think about that.
Yeah. So what I would say is as we guided in my prepared remarks, we expect provisions to remain elevated in the U S off effects, specifically, how exactly that will play out from a performing worse as an impaired perspective, and then write offs overtime is a little bit uncertain.
What I would draw and I'd reiterate is overall our credit portfolio is performing very well in the U S. So it is isolated to the office sector of everything that we are seeing and as I said in my prepared remarks, we have worked through 40% by end of year. We will have worked through 50% of your entire book.
But we're doing so on loan by loan basis, we're doing so on a very very granular and very intense bases and we have a dedicated team doing that but then again coming back to your question how exactly that will play out is a little bit more uncertain and it is very hard to predict or very hard to give you concrete guidance on it.
Okay, and then just sticking with you.
The change in the.
Debt service ratio drove the performing build this quarter was it all related to the I guess the unexpected rate hikes I guess it isn't as simple as that or was it a combination of the higher rates and.
Changes in another expectation like lower income expectations or something something along those lines I guess, where I'm at right volume as you suggested there is two rate hikes, one of which.
And it just seems like a relatively sharp failed for want of unexpected rate hike.
Yeah, and I did comment a little bit about modeled sensitivity to so to answer. Your question. It is mainly driven by debt service ratio. It is mainly driven by the interest rate hikes, we actually fee income I'm still trending higher.
And that would in part offset but not fully offset debt service ratios. So it is driven by that and well as I said, it's a well it's coming back to debt service ratios and it is coming back on how that plays out for for our Canadian consumer portfolios in from an expectations.
Victor.
Okay I appreciate the time.
Thank you.
Next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning, I'm, sorry, a little technical difficulty, but can you hear me okay.
Yes.
So I want to go back to.
U S commercial real estate, there's no doubt you can look at your supplement and look back a few years that the bank grew U S commercial loans commercial real estate in particular.
There was some robust growth there for a period.
So while I.
I think it's fair to say U S commercial real estate losses might be messy quarter to quarter, they're not going to impact the banks capital in a meaningful way.
So what matters more to me now is.
Does this change cibc's strict strategy in the U S now that you've seen.
The uncomfortable side of all of that growth.
Does this sort of have you revisit your growth strategy in the U S.
Mario It's Sean Thanks, very much for the question. So I'll come back to that question, specifically, but just stepping back for a minute for some context, a other than the office portfolio. Our U S business continues to demonstrate strength and solid performance notwithstanding the current environment, we generated strong quality loan.
Growth.
Pleased with our deposit performance as Raj talked about seeing that stabilizing with the rate environment stabilizing we had NIM improvement year over year and our outlook for Nims are stable.
And while we continue to invest in our business as you've seen the rate of growth in our expenses is moderated significantly and that combined with really realizing on the investments we've been making over the last couple of years and staying really focused on the connectivity and bringing all of our businesses and our capabilities across capital.
Markets wealth management and commercial to our clients generated double digit pre tax pre provision earnings what we are seeing in credit.
As a general matter is performing well, so where we are seeing Ivy issues is in commercial real estate and in particular.
And the institutional office space.
It's a it's a part of the business, we're deemphasizing and as that transition continues youll see CRE, a wind up being a smaller percentage of the overall U S portfolio as our commercial and industrial in our wealth businesses continue to grow and.
And Mario just to just to build on those comments from Sean we absolutely feel good about the strategic investment thesis that we laid out years ago about investing in the United States. Our investment has been a very good investment on top of that commercial banking investment. We've built a really strong wealth management business that we're going to we're going to.
To grow now, especially when our technology gets implemented this fall our capital markets business as you see in some of the slides that Harry's business has are growing in a hurry it might be worthwhile, commenting on the capital markets business in the U S. We've grown up our U S earnings our pretax pre provision from what was 2% many years ago to over two.
20% today, and we plan to continue to grow that because I think we think it's a good diversified for our bank and it's a well diversified well managed portfolio aside from the noise of the U S. Commercial office real estate piece, which we will work through Harry maybe you want to build on that.
Yes, good morning, I, just add that the U S part of our capital markets business is really well connected to sean's world and commercial and wealth like it is in Canada to John's World and commercial and wealth and our retail franchise and so we're really focused on delivering for clients in the U S and that's working really well.
We're very very well diversified were specific in the industries. We operate in we're very focused on the new economy. We've got a great team in the U S and we're delivering outsized returns and you see the numbers are year on year. So we're very pleased with the results are very highly connected franchise. It really a differentiated platform and it's working well. So I appreciate all those comments they they certainly.
You know resonate with me, but I want to go back to this for a moment so even even if these credit losses on U S commercial real estate other than causing some lumpy quarters.
And assuming they don't affect capital, which I strongly suspect that they won't there are theres still an application here, but what I'm getting at is core.
Commercial real estate and construction lending in the U S is the single largest category of loan in.
In the U in the U S business and government loans, and if Youre deemphasizing that and maybe just to go onto Sean if you're deemphasizing that.
Doesn't that necessarily point to slower growth in the U S. Over the next couple of years as you deemphasize that business.
Yeah, I think it's fair to say relative to be the rate of growth that we saw over the last couple of years part of that is environment and part of that is going to be strategic choices and as that portfolio transitions that will mute growth certainly on the CRE side, but we are still looking at you know our outlook is still for single mid single digit.
Our loan growth in the business and it's going to be driven primarily through our C&I business and our wealth management business.
Businesses that I think if you look at the mix out five years there'll be a more capital light in nature. They are more be more Roe enhancing in nature and part of our business models. This connectivity concept that Harry touched on that drives a better ROE so while that may.
That aspect the real estate aspect may slow down I think the team has got a good handle on how we can grow the rest of the business just maybe it was something quick on U S margin.
Feel like like I watched these Canadian banks careful I watched the U S banks carefully I think CIBC might be the only bank, where U S margins were actually up in Q3, it's a surprise given what what played out for everybody else.
Now I I also observed that the deposits are down so what I'm kind of wondering is.
If there's going to be a quarter, where CIBC decides it needs to protect us deposit share.
And we actually see the margins come under pressure like we are seeing for virtually every other every other bank. So what it appears to me is that cibc's protecting the margin, but willing to give up some deposit share am I reading, the tea leaves correctly or not.
I'm married with Shaun So what I'd say is.
Our noninterest bearing deposits held them pretty steady this quarter and you're right on a average basis quarter on quarter deposits were down, but frankly on a spot basis, they're actually up somewhat and.
And so we've had you know our deposit betas on our interest bearing are higher than they've been through the cycle and so we've been paying for deposits with her but it's a very client focused strategy and we're working with our clients to price. Those deposits were also making investments in our deposit franchise in terms of additional capabilities and new products will be law.
Those just to enhance our overall deposit franchise, but.
But it's not been seeding deposits like ceding share for margin or our margins have held in on the asset side our spread.
Spreads have been a help offsetting some of the the cost of funds pressure on the deposit margin side.
We've had the benefit of them both the rising rate environment, but also the impact of the hedging program that has that <unk> spoke about earlier.
That combined to that a couple of basis points as Raj mentioned, there was a bit of noise in the quarter you pick a couple to a few basis points off of that.
Increment, but the two basis points.
We are it is not one time, it's a it's a function of all those elements that I just went through.
Very much.
Thank you. Our next question is from Nigel D'souza with Veritas investment Research. Please go ahead.
Thank you good morning, I wanted to follow up on the ranks on the debt service ratio and should we read into the impact that that that the CIBC has a more interest rate sensitive a borrower and then in terms of the outlook when I look at your forecast for the debt service ratio.
Next 12 months, we expect that the run materially above where it was that in 2019 and kind of remain at the 2019 love level for the rest of your forecast spirit and you're also forecasting unemployment there roughly.
2019 levels, maybe a little bit higher so given that context wouldn't it be reasonable to expect that at all.
Losses next year over the next 12 months with run above.
The losses, we saw in 2019.
Oh Wow.
So a couple of points one I wouldn't take that as an indication that our clients are more interest rate sensitive and there's certainly some element of mix in there.
But overall, we do not see that as being a big driver.
As I said before I think we maybe are having having models that are a little bit more sensitive to changes in that metric, but don't take that as an indication of a difference in credit for client profiles, because we are not seeing that.
Thank you.
Okay.
From an outlook perspective.
Yes, I think part of the part of the indications is if the economic environment plays out as all models predict and as we expect interest rates to come back a little later, we could expect that part of 'twenty four or technically all of 24 runs a little bit ahead of our 2019, but again there was a lot of more.
Moving parts here and it's certainly too early to give you a good outlook on fiscal 'twenty four altogether.
But overall I would say yeah. It's it's certainly not an indication of credit quality. It is an indication of what we have put into our forward looking indicators, how our model to react to that and then what we will see over time is how that plays out in reality, if the economic environment evolves.
Okay. That's helpful. That's it for me thanks.
Thank you.
Our next question is from Darko <unk> with RBC capital markets. Please go ahead. Please go ahead.
Hi, Thank you good morning, Ben going back to Frank I really appreciate the disclosures that you provide but sometimes I think the disclosures may not actually helped me.
And I'm asking you. This question Frank because you know your bank.
You know it had a bit of a bounce in performing.
Tcl's last quarter. It was released so I kind of want to get to the bottom of a couple of things and really what I'm looking at is one of your slides.
But looking at slide 40.
And you show them mortgages that are coming up for you.
Due for renewal.
This year 37 billion and then you show me.
The high risk.
Clients.
$330 million, which is.
Fairly small, but when I look at the definition of what you're calling a high risk client diabolically different from what I'm worried about.
I do not care about people, who have a shallow relationship with CIBC, we worry about I think our clients with a deep relationship with CIBC that have credit cards and unsecured credit.
We worry about client those same clients that might have little Bureau scores.
And clients that are facing a large increase in mortgage payments.
And don't have cash resources, so that would be my definition of higher risk not shallow relationships. So.
Am I wrong in thinking that that is the cohort that I'm describing would be the cohort driving the performing PCL increases and and you know how big is this cohort not just for 2024, but also 2025 and so.
I realize I'm asking for a lot and don't expect you to throw some numbers right now, but maybe you can tell me where I'm wrong in thinking about what I should really be concerned about.
Yeah. So so darko. Thanks, thanks for the question I'll, probably not throw numbers if you indicate that.
What we are looking at is deep relationship clients, we know how they behave on their credit card, we know how they behave on their unsecured lines. The deeper the relationship is with us the better the behavior.
The actual results are and one thing that is giving US comfort is we're actually seeing more of that client over time, and we have an opportunity to react faster than we would do on a mortgage only or on the shallow relationship.
That is why and Youre absolutely right. We are watching those segment very very closely.
But which is why we maybe a little less concerned about those segments just because we have more information we have more opportunities to work with those clients and addressing that early.
The other point I will make is I mean, we are very very closely monitoring our variable rate mortgage clients. We know their renewal schedules. We look very closely into what payment trucks are again under our assumptions of where interest rates are over time.
And we do feel comfortable as we disclosed on the slides here.
That those payment chalks, even though they are high and they will certainly go higher over time are manageable for those clients and a couple of points that help in in that is.
Won a lot of those clients would have being qualified at a lot higher rates in the past and yet they may still go into an even higher rate, yes that is a real payment shortcoming, but at least from a qualification perspective, those clients were tested and underwritten at a lot higher rates.
And one thing I can tell you as well is we had around call. It close to a 100000 clients already renewed into that higher interest rate environment $25 billion of mortgages.
In the last Ah or year to date and what we are doing is we are monitoring that cohort very very closely from a delinquency rate perspective and in particular, if you go back and sort of what we call. The six to eight months' performance in that book, so going back to our renewals and Refis in Q1 of this.
Fear those clients are performing broadly in line with what we would have seen in 2019, so there's no areas of concern.
That we are seeing so far emerging because clients are absorbing them higher payments in and at renewal.
I I don't know whether that addresses your question, but that's probably all I can mention here.
No. That's thanks, I realize I'll have some follow ups, where you after Frank and some technical questions around everything you've just said so I appreciate it I just.
I, just I I scramble, a little bit because its debt service ratios are climbing.
And I appreciate that many of these customers were underwritten with a stress test on interest rates, but.
I'm not certain that the stress test also would have incorporated high inflation.
And I, just worry that especially not necessarily the next 12 months with 12 months after.
Where the payment shock is really hired that even if you've seen customers with a bit of a payment shock recently that the outcome could still be quite different.
So happy to discuss offline Frank but thank you very much for the entry of it is helpful.
Thanks, Docker and looking forward to your follow up questions.
Thank you. Our last question is from surrounds mother, Haiti with BMO capital markets. Please go ahead.
Okay I know we've gone over thank you for squeezing me in maybe a couple of quick ease.
Frank can you tell us what the loan to value on the office properties are after the allowance.
And how that compares to last quarter.
Well I can't give you a number here, it's certainly in line with expectations I'm.
I'm not certain what number I could give you here because the biggest driver in itself, it's certainly not the allowance.
It is driven by whenever we get new appraisals, we feed the market evolving and again that is a location by location on Cerro Verde. The values can go down significantly from what we would've seen in.
Appraisals that we would've gotten six months nine months or a year ago.
And from an LTV perspective, I think that is the biggest driver, but it's also one where we don't have an ongoing review of appraisals for every single file, but we are the appraisals when whenever we feel it's a it's right and as I say that is probably the bigger driver and which is why I can't give you a real give you one number on.
On your question.
Okay, and maybe just for the broader management team you get paid a lot of money was there any subjectivity exercised over the models specific.
Specific to performing reserve build this quarter or was that really since last quarter.
Or are the models running the bank yes.
Yes, there was and yes, there was in both cases.
Did you add or subtract from this quarter.
Did the subjectivity.
To that provision built in this quarter or did it hold it back.
There's a lot of moving parts, but.
Certainly.
The increase that we would have seen in our Canadian personal businesses.
And what we what we do is that expert credit judgment is essentially balancing a little bit what we talked about this cause namely what is the model predicting versus what are we seeing from a credit risk perspective, and we felt the market was growing a little bit more sensitive than we would've thought so we dampened that increase and why.
Do I say, we do feel a lot of moving parts, we certainly added a little bit on the U S office portfolio. So there's always moving parts.
And that is directionally, what I would say for for this quarter.
And maybe I'll, maybe I'll add on that sorry up right. As you know look this isn't just management judgment and gut instinct right. There was an accounting standard.
Requirements under the accounting standard we hate we manage to an appropriate allowance that follows the ifr S. Nine guidelines, which require us to provision and have an allowance with based on the expectation based on stage one for one year and lifetime for anything Thats in stage two it's a very government processes.
As said the models produced the results, we look at that versus expectations apply the credit judgment. However is required to get to the right answer and the appropriate prudent allowance number and then we go through our governance processes in order to finalize that.
Okay. Thank you for squeezing me.
Okay. Good and thank you startup for that question as I said earlier, we are going to continue to work on refining our models so that they deliver even greater.
Later consistency quarter to quarter again on a year to date basis, I think it's important to know where we stand relative to the peer group and very much in line on the performing standpoint, when you factor in mix differentials.
As I also said during the call it's really important to focus on the earnings fundamentals of our business.
We had solid results on those earning fundamentals due to the strength and diversity of our business model in all of our business units in Canadian banking.
In U S and our U S region, and our capital markets and we've got prudent risk management I think that that stands we have is prudent with little less volatility it'll even be better. We continue to demonstrate steady organic growth. We have clients building relationships with our bank. It's fueled by a client focused strategy and it's supported by an.
Recently digitized infrastructure, which in fact quite frankly has allowed us to start reducing our costs in certain areas, including head count, which you see on a year over year basis and that again stand so differently from our peers I think our achievements are a testament to the unwavering dedication of our team whose hard work and commitment have contributed to our success.
Want to extend my sincere appreciation to each CIBC team member, who is driving better at client net promoter scores and deeper relationships, we've implemented initiatives that not only address our clients' evolving needs, but also align with our long term strategy to deliver sustained value to our shareholders. As we continue to navigate a dynamic economic landscape we remain steadfast.
And her dedication the purpose of helping our clients realize their ambition and to deliver value for our shareholders. So I. Thank you for your trust and continued support and for your questions and I look forward to our ongoing engagement with our team as frequently as you would like thank you have a good day and a good labor day weekend.
Thank you everyone. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Yeah.
Okay.
Yeah.
Yeah.
Yeah.
Yeah.