Canadian Imperial Bank of Commerce F3Q09 (Qtr End 07/31/09) Earnings Call Transcript

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Canadian Imperial Bank of Commerce (NYSE:CM)

F3Q09 (Qtr End 07/31/09) Earnings Call

August 26, 2009 03:00 pm ET


John Ferren - Vice President of Investor Relations

Gerry McCaughey - President and CEO

David Williamson - Chief Financial Officer

Tom Woods - Senior Executive Vice President and Chief Risk Officer

Sonia Baxendale - Senior Executive Vice President, Retail Markets

Richard Nesbitt - Chief Executive Officer, CIBC World Markets


Steve Theriault - Bank of America-Merrill Lynch

Andre Hardy -RBC Capital Markets

Michael Goldberg - Desjardins Securities

Brad Smith - Blackmont Capital

Sumit Malhotra - Macquarie Capital

Mario Mendonca - Genuity Capital Markets

Ian De Verteuil - BMO Capital Market


Good afternoon, ladies and gentlemen. Welcome to the CIBC third quarter results conference call. (Operator Instructions). I would now like to turn the meeting over to John Ferren, Vice President, Investor Relations. Please go ahead.

John Ferren

Thank you. Good afternoon. Thank you everyone for joining us today. This afternoon our management team will discus CIBC's Q3 results released earlier this morning. This conference call is being audio webcast and will be archived later this evening on We'll follow the usual format of some prepared remarks from CIBC's senior management team followed by a question-and-answer period.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. Certain material factors or assumptions may be applied, which could cause CIBC's actual results in future periods to differ materially from the conclusions, forecasts or projections in these forward-looking statements. For more information, please refer to the note about forward-looking statements in today's press release.

With that, let me now turn the meeting over to CIBC's President and Chief Executive Officer, Gerry McCaughey.

Gerry McCaughey

Thank you for joining us. Let me remind you that my comments may contain forward-looking statements and actual results could differ materially. Following my remarks, our senior officers will provide an update on their respective areas.

Today, CIBC reported a net profit for the third quarter of C$434 million and cash earnings per share of C$1.4. Earnings apart from items of note were C$1.36 per share. In our items of note, we have reported a gain from our structured credit run-off portfolio that for many quarters has created losses for CIBC. This is somewhat encouraging as in the past we have highlighted structure credit as our area of greatest concern.

We had a positive outcome this quarter from having decreased our positions through risk reducing transactions, settlements with our financial guarantor counterparties, right-off, as well as improved market conditions this quarter and some amortization.

In the items of note, you'll find that the largest item was mark-to-market losses through our normal course loan hedging activities. In previous quarters, we had gains in this area due to deteriorating credit conditions. This quarter, as in previous quarters, narrowing credit spreads reduced the previous gains.

While this did have a negative impact this quarter, over the longer term, it is very encouraging as we do own the offsetting loans that these items are hedging. These loans are not mark-to-market that will bode well for future credit performance in our loan portfolio. David Williamson will review these and other items of notes that impacted our results in his presentation.

Loan losses were somewhat higher in the quarter. As we expected, we booked higher losses in our discontinued UK and US corporate loan portfolios as well as in our US commercial real estate portfolio. Card losses were also higher. As you will hear from Sonia Baxendale, delinquency rates have improved on a quarter-over-quarter basis and on a consecutive month-over-month basis, and that should lead to lower slow write-off moving forward in quarters ahead.

Canadian corporate and commercial loan losses were up as well in the quarter. Although as Tom Woods will comment on these, we believe that we will see improvements in the quarters ahead. Again, we will report a strong capital position this quarter. On our Tier I capital ratio, we improved to 12% through the end of July, up from 11.5% last quarter, and our total capital ratio improved to 16.5% from 15.9% at the end of April.

As we stated previously, in addition to this capital strength, it should be noted that we have set aside large amounts of risk related assets for any remaining losses that we might experience in our structured credit portfolio. This means these losses, if they occur, such as through writing off financial guarantor CVAs, will have a significantly reduced impact from a capital viewpoint.

In summary, our capital strength is a clear strategic advantage for CIBC, both dealing with the unknown environment of today as well as opportunities for the future.

Turning to our business results. CIBC Retail Markets performed well during the quarter, with net income of C$416 million and revenue of C$2.3 billion. We had solid revenue growth in both personal and business banking, while revenues in wealth management also improved, in what was a better environment from the previous quarter.

We continue to invest across all of our client access points, branches, ABM, online and telephone banking. Expenses remain well contained and our combined revenue expense mix provides good operational leverage that is aligned with our strategic comparative of consistent and sustainable performance. Sonia Baxendale will provide a more detailed update on our progress in her remarks.

In Wholesale Banking revenue was C$572 million and net income was C$179 million, excluding items of note. These results for Wholesale Banking reflect the progress of our core business strategy within our risk context that we set forward in 2008. Wholesale Banking has a good strategy in place and several initiatives that are making positive progress. Richard Nesbitt will comment on these further in his remarks.

During the quarter, we continued to manage our structured credit run-off portfolio. We commuted our US residential mortgage market exposure with a financial guarantor, and restructured a non-US residential market exposure with the same counter party for a gain of a C$163 million.

We terminated C$2.8 billion of written credit derivatives in our correlation book for a gain of C$8 million. We terminated C$448 million of written credit derivatives with exposure to commercial mortgage-backed security for a gain of C$49 million. Normal amortization reduced the notional amount of credit protection purchased from financial guarantors by C$215 million.

Gains from these activities were offset by market-driven CVAs on financial guarantors and other items. However, the net activity this quarter led to a positive result in structured credit. We are currently continuing to proactively manage this portfolio and reduce our positions and in this quarter, we are finding further opportunities to do so. David will cover our progress in this area in his presentation.

While investing in our business, we have continued to effectively manage our expenses. Total expenses for the third quarter were C$1.7 billion, down from C$1.73 billion a year ago. Excluding items of note, our cost to revenue ratio was 57.2%. This expense level continues to be better than our baseline target of C$1.78 billion.

While making progress on expenses very importantly, we are investing across our businesses. Key areas of focus in Retail Markets include, broader access to more branches and extended hours, including Sunday openings and enhancements to our strong advisory capabilities. Sonia will talk more about our actions in these areas in her remarks.

In Wholesale Banking, we have also identified several opportunities that are encouraging, including the areas of corporate lending, foreign exchange, securitization and electronic trading. Electronic trading has affected our growth area where we have had strong results and market leadership this year.

Richard will comment further on our Wholesale Banking opportunities in his remarks, referring to both the opportunities of this quarter, as well as, the opportunities ahead for this business. In the area of productivity, we remain focused on our normal run rate expenses, while investing to support growth in our revenue.

In summary, CIBC's core business performance this quarter was solid, given the prevailing economic environment and our cautious risk approach. We showed progress in both our Retail and Wholesale Banking businesses that we believe are establishing momentum.

In order to reinforce this momentum, we are continuing to invest in our businesses, while watching the external environment carefully and maintaining a prudent approach to these uncertain times, while keeping in mind that uncertain times do give rise to further opportunities which we believe, we are in the process of taking advantage of.

Now, let me turn this meeting over to David Williamson for his financial review. David?

David Williamson

Thank you, Gerry. My comments also contain forward-looking statements and I would remind you that actual results could differ materially. I'm going to refer to the slides that are posted on our website, starting with slide five, which is a summary of our results for the quarter.

We reported earnings per share this quarter C$1.02 or C$1.04 on a cash basis. Our items of note for the quarter are listed on the top right of the slide, totaling C$0.32 per share and our cash EPS excluding these items is therefore C$1.36 per share. I'll summarize each of the items of note briefly.

The largest item this quarter was C$0.27 per share of the loss resulting from the impact of improved credit conditions on our Canadian corporate loan hedging program. As Gerry said, the improvement in this credit conditions would indicate a better outlook for our Canadian corporate loan portfolio and should result in better loan loss experience in the longer term.

In the short-term, improved credit conditions have a negative impact on our results through the mark-to-market of our corporate loan hedging program.

Next, we reported the gains of C$0.17 per share on our structured credit run-off business. I'll cover this in more detail, when I turn to the next few slides. We had loan losses in our UK leverage loan and other run-off portfolios of C$0.15 per share and we increased our general allowance by C$0.07 per share.

We had four other items of note that net to no impact on our per share basis and C$2 million pre-tax amount. The details associated with these four items are provided on slide 38 of the presentation. Excluding these items of note, third quarter results were helped by higher revenue in Wholesale Banking and higher volumes in our Retail Markets businesses, but were hurt by higher loan losses and lower treasury revenue. As Gerry mentioned, we reported a strong capital position this quarter with a Tier 1 ratio of 12%, up from 11.5% last quarter. The next slide provides a summarized statement of operations on a reported basis showing net income for the quarter of C$434 million.

Turning now to a summary of structured credit run-off. We had net gains this quarter totaling C$95 million versus loses in Q2 of C$475 million. First, we had losses of C$148 million due to credit evaluation adjustments on our hedged positions, primarily driven by deterioration in the credit quality of financial guarantors. We also had losses on our unhedged non-USRMM positions, totaling a C$151 million, driven by the narrowing of spreads on our underlying assets relating to the unmatched purchase credit derivatives.

Next we had gains of C$41 million on our unhedged USRMM market positions, driven by improvement markets and amortization. We also had C$90 million of gain on purchase credit derivatives, hedging, held-to-maturity CLOs and trust preferred securities.

We also had gains on terminations and commutations of C$220 million during the quarter. As Gerry mentioned, we continue to take action to reduce our positions within structured credit runoff portfolio this quarter. We commuted our US residential mortgage market contract with a financial guarantor and transferred our remaining non-USRMM contracts to new entity as part of the restructuring which resulted in a gain of C$163 million.

We also terminated 2.8 billion or US$2.6 billion of written credit derivates and the correlation book resulting in a gain of C$8 million, and we terminated C$494 million or US$452 million of written credit derivatives with exposure to commercial mortgage backed securities resulting in a gain of C$49 million. In addition, normal amortization reduced the notional of our purchased credit protection from financial guarantors by C$215 million.

The other line, includes a gain of Montreal Accord related notes and a decrease in credit valuation adjustments against other than financial guarantor derivative counterparties, partially offset by increased treasury allocations and direct expenses, all of which nets to a C$43 million balance.

Slide eight is a summary of our financial guarantor protection, purchased against our US residential mortgage market exposure. In US dollars, the slide shows that we have C$597 million of credit protection from two remaining counterparties, which now has a fair value of C$527 million. This is well below Q2 levels due to the commutation of the contract I mentioned previously with a financial guarantor report on the slide and in our other disclosures at counterparty V.

We have taken cumulative credit valuation adjustments of C$368 million and therefore have a remaining net fair value of a C$159 million as shown in Column D. In addition, we have a remaining value of C$70 million shown as the difference between columns A and B for a total remaining exposure of C$229 million. Slide nine outlines the counterparty protection provided by financial guarantors where the underlying assets are primarily CLOs and corporate debt that are not related to the US residential mortgage market.

Looking at the total remaining protection as shown at the bottom right of the slide, our net receivable from guarantors was C$1.6 billion at July 31 after a cumulative valuation reserve of C$1.9 billion. We had total risk-weighted assets against the non-USRMM portfolio already included and our July 31 Tier 1 ratio of approximately US$8.5 billion. This can be split between risk related assets of US$4.2 billion relating to the receivable from the guarantors and US$4.3 billion relating to the risk remaining in the underlying assets. If we have to write-off the entire US$1.3 billion net receivable, the impact would be approximately 55 basis points.

If we recovered 15% of our gross receivables from financial guarantors in this portfolio the impact on our Tier 1 ratio would be approximately 20 basis points. If we held the credit quality of financial guarantors constant but assumes assets values declined to C$0.80 on the dollar from the current C$0.85, the impact on our Tier I ratio would be approximately 40 basis points.

Slide 10 highlights the progress that has been made in reducing our underlying non-USRMM exposure through a notional balance at the end of Q3 of approximately US$18 billion. This exposure is down over US$3 billion as a result of the transactions that have been completed since the end of the prior quarter. As the slide shows, we now have over US$5 billion of excess protection from financial guarantors. The additions of the matched and unmatched columns on the slide tieback to the total shown on slide nine.

Turning now to our business results starting with Retail Markets on fund slide 11. Revenue for Retail Markets this quarter was C$2.34 billion, down slightly from Q3 of last year. Personal banking revenue of C$1.5 billion was up C$40 million or 3% from Q3 of last year. We experienced strong volume growth across most of our key products, as well as higher lending spreads, partially offset by narrower deposit spreads, lower mortgage refinancing fees and lower treasury allocations.

Turning to business banking, revenue of C$343 million was up C$3 million or 1% from Q3 of last year as improved customer rate changes, and to a much lesser extend, higher treasury allocations were offset by the impact of a lower interest rate environment.

Slide 14 highlights the results of our Wealth Management businesses. Wealth management revenue of C$318 million was down C$75 million or 19% from Q3 of last year. Weaker equity markets have resulted in a decline in asset value based fee income and lower trading commissions.

FirstCaribbean revenue of C$169 million was C$4 million or 2% from Q3 of last year, mainly due to the impact of a weaker Canadian dollar and higher treasury allocation. These factors were offset partially by narrower spreads and lower securities revenue. Other revenue was relatively unchanged in Q3 of last year, as treasury allocations were consistent with the prior year.

Retail Markets net income was C$460 million, down C$149 million or 26% from the prior year. This decrease was driven by a higher provision for credit losses, due primarily to higher write-offs in the cars and personal lending portfolios. The topic that, Tom Woods will discuss in his remarks.

Expenses were down C$53 million or 4% from last year as we continue to be focused and disciplined in managing our costs.

Slide 17 shows our net interest margins. On the bottom row, you can see that total Retail Markets net interest margin was down seven basis points versus the same quarter last year, as favorable pricing was more than offset by the lower interest rate environment.

Now turning to Wholesale Banking, revenue of C$531 million in Q3 was helped by net gains in structured credit run-off. As noted on the slide, revenue adjusted for the impact of structured credit is C$421 million. If we were to exclude all of the items of note related to Wholesale Banking, revenue for Q3 was C$572 million up C$26 million from the prior quarter on the same basis.

Looking at the individual lines of business, starting with capital markets, revenue was C$325 million, compared with C$380 million in Q2. Higher revenue in our foreign exchange business and higher debt issuance activity was partially offset by lower equity trading revenue.

Corporate and investment banking revenue of C$221 million was up C$21 million from Q2, driven by gains in our core merchant banking portfolio, higher revenue in corporate credit products and US real estate finance. Other revenue was negative C$9 million in Q3 and was driven by the items of note, related to Wholesale Banking that I outlined at the beginning of my remarks.

Wholesale Banking net income was C$86 million in Q3, excluding structured credit, net income was C$21 million. If we were to exclude all of the items, highlighted as items of note related to Wholesale Banking, net income for Q3 was a C$179 million, down C$21 million from the prior quarter on the same basis, mainly due to higher loan losses.

The largest item of note in Wholesale Banking result is the mark-to-market loss of a C$106 million relating to losses in our Canadian corporate loan hedging program. As I said earlier in my remarks, this loss is caused by the improvement in credit conditions.

Turning now to our total expenses and our performance versus our target, which is the whole expense flat relative to analyzed fourth quarter 2006 expenses. We have made adjustments as noted on the slide to ensure a reasonable comparison. As you can see, we are far ahead of our objective, due to continued expense discipline.

Thank you for your attention. At this point, I'll turn it over to Tom Woods.

Tom Woods

Thanks David. My comments also contain forward-looking statements and actual results could differ materially.

With respect to credit risk on slide 43, specific loan loss provisions were C$505 million or 121 basis points of net loans in acceptances. The quarter-over-quarter growth of a C$176 million was due to first, an increase of a C$134 million in provisions for corporate and commercial loans. This was mainly due to losses in our UK run-off and US real estate finance portfolios.

Second, an increase of C$42 million in consumer lending, where cards and personal lending losses accounted for most of the increase due to higher bankruptcies and delinquencies, flowing through to write-off. I'll discuss the cards portfolio further on the next slide.

Gross impaired loans increased by C$405 million this quarter, primarily related to our UK run-off and US real estate finance portfolios. Otherwise, gross impaired loans in our consumer portfolios were up only marginally in this quarter.

On slide 44, our current net credit loss rate in Q3 was 7.1% versus 5.6% last quarter. As we've discussed in our webcast for the last several quarters, we've deployed several account management initiatives in this area, while controlling the dollar value of losses, this is also constraining growth in balances outstanding, which has a tendency to increase today's loss rate in percentage terms.

If we draw an industry growth rates in 2009, our NCO rate would have been 51 basis points lower. News that could prove to be encouraging, although not a certainty is that, delinquency rate started to improve during the quarter.

Loan losses in future quarters will be driven largely by the extent towards the early signs of economic recovery take-hold, together within the case of our corporate loan, company-specific event, as you know, we've had over five years with very few corporate loan losses since we reduced risk levels in this portfolio starting in 2002/2003.

In many cases, a decision whether to impair a credit or take a provision is a judgment call. In these cases, we believe, we've aired on the side of conservatism. With these caveats, our current outlook for the next few quarters is that current loan losses should be relatively stable, before improving as unemployment levels and bankruptcies improve. The outlook for other unsecured loans, as well as, corporate loans is positive relative to Q3.

Turning to market risk, slide 45 shows the Q3 distribution of revenue in our trading portfolios. In Q3 all of our three trading days are 95% of the time, have positive revenue, essentially the same as last quarter and up from 67% in the third quarter of 2008. The trading revenue here does not include the impact of mark-to-market value of our structured credit assets as this analysis is carried out only at each month end.

Slide 46, the Tier 1 ratio as David said was 12% at July 31, up from 11.5% at the end of Q2, the 50 basis point increase was a result of retained earnings and lower risk related assets, mainly due to the strengthening Canadian dollar and lower market risk.

I'll now hand it over to Sonia Baxendale, Head of Retail Markets.

Sonia Baxendale

Thanks Tom and good afternoon everyone. My remarks may also include forward looking information and actual results could differ materially.

Revenue growth in our personal and business banking segment was up 8.8% quarter-over-quarter, while our wealth management business experienced revenue gains of just over 7% in the quarter in what was a better market environment from Q2. Across Retail Markets we continue to invest in our branch networks to provide even greater access to advisory solutions for our clients.

Our investments and access not only included branch openings but extended hours in existing branches as well. We opened or expanded 11 branches this quarter, bringing our total year-to-date total to 28. We remain on track to open, relocate or expand 40 branches by the end of the year. We now have 39 branches operating on Sunday across the country, which will increase to 45 by the fourth quarter.

Supplementing our branch strength is online banking. CIBC was again voted the best consumer internet bank in Canada with the best online consumer credit site in North America for the second year in a row by Global Finance Magazine.

Personal banking funds managed increased 4.2% quarter-over-quarter with growth coming from deposits and secured lending. Strong growth in deposits with an 81 basis points increase in market share versus the prior quarter was driven by a new high interest savings account, which was launched in May. This new account is available to clients through the Wood Gundy brokerage network and also third-party brokerage channels.

Our deposit growth was also supported by our strong checking accounts summer campaigns, and continued strong tax-free savings account sales. Combined, these initiatives contributed to strong balance growth.

In personal lending and mortgages, real estate secured lending was up 6% on the year and 2% quarter-over-quarter. Unsecured lending was flat on the quarter. While, losses were up slightly, they remain well within expectations in the current economic climate.

In credit cards, our cautious approach to growth to manage portfolio risk in the current environment has resulted in a stabilized and now improving delinquency trend. Delinquencies have improved both on a quarter-over-quarter basis and on a consecutive month-over-month basis throughout Q3.

In addition, all stages of delinquency, early and late stage delinquencies have decreased quarter-over-quarter. This will result in lower flow write-offs moving forward. However, consistent with the broader industry trends year-to-date, personal bankruptcies have continued to rise and are a driver in our overall net credit losses.

Overall, the portfolio was performing inline with the market reality of higher levels of unemployment. Our spot cards outstanding remains flat this quarter at 13.8 billion. Moving forward we anticipate growth rates within low to mid single digit range related to ensuring ongoing credit quality in our credit card portfolio.

Business banking revenue is up 10% quarter-over-quarter. We remain comfortable with credit quality, despite a moderate increase in the risk profiles driven by the current economic climate.

As I mentioned earlier we saw improvements in our wealth management business in the third quarter helped in part by the market condition. Mutual funds continued to experience strong long-term fund flows with the second highest net sales of long-term finds in the industry. The majority of our funds are performing above median on a one-year and three-year basis. Money market funds however continued to experience migration to other products.

Improving markets benefited our retail brokerage businesses with assets under administration up 8.8% in Q3 versus Q2 and trade volumes up as well in the quarter. We continue to focus on providing industry leading advice and building capabilities in the areas of tax and estate planning.

In summary, CIBC Retail Markets experienced solid revenue in funds managed growth this quarter. At the same time we continued to invest in our core businesses in order to achieve CIBC's overall objective for consistent sustainable long-term growth.

Thank you. I will now turn to Richard Nesbitt.

Richard Nesbitt

Thank you Sonia. My comments may also contain forward-looking statements and actual results could differ materially.

I will review third quarter performance forward-looking for CIBC's Wholesale Banking business and provide an update on our business strategy. When we introduced our strategy last year we committed to repositioning our business for consistent profitability within a rapidly changing Wholesale Banking market place. This strategy focuses on traditional areas of strength in our capital markets and our corporate investment banking businesses.

Results for the quarter show continuation of a trend with solid, high quality earnings aligned with CIBC's risk appetite. This is a positive signal for our business given our focus on client-driven growth and a disciplined approach to risk. In our corporate investment banking businesses, which are comprised of investment banking, corporate credit products, US real estate finance and our core merchant banking, revenue is up from posted increase revenues over Q2.

The key driver of the performance in this area has been the decision we made earlier this year to manage our corporate lending capabilities separately from our investment banking activities. Now, lending supports all over activities across Wholesale Banking. Today, our corporate credit products business serves the entire large corporate Canadian market.

At a time when many foreign banks have withdrawn from the market place and many Canadian banks are at limits on certain names, this initiative has worked very well. In addition to maintaining a high level of service to existing clients, we're adding a number of new accounts. We've added four new investment credit accounts already this year and we have a pipeline of at least half a dozen new accounts on the way.

Revenues have steadily increased over the past three quarters and this is a strong core traditional business for CIBC that will continue to be a significant contributor to our earnings moving forward.

Investment banking revenue in Q3 was comparable to Q2 and as was the case last quarter, strong fees from equity new issues, were offset by slower M&A and advisory activity. According to Bloomberg, CIBC is the leading Canadian equity underwriter, this calendar year. That's from both, from a market share and a deal credit perspective.

Revenues in our real estate finance business were strong. However, we did see some loan losses attributable to the challenging economic and real estate market conditions in the United States. We are closely managing this portfolio, but as I said previously, we do expect to see some additional losses given the commercial real estate environment in the United States.

Our capital markets business which is comprised of cash equities, fixed income, currencies and distribution and derivatives and strategic risk performed well in this quarter. Our fixed income and global derivatives businesses continued to leverage solid revenues, improving on what was a strong second quarter.

We had solid trading income and new issue activity. Year-to-date, we are the leading investment bank in government new issues on a bonus credit to lead basis also according to Bloomberg. We are also enhancing our position in corporate debt new issues, and we have recently hired a new Senior Manager to lead this activity.

Another opportunity for the future is our securitization business. We took early and aggressive action to reduce our commitments to lower margin, asset backed conduit programs. This business previously operated a profit spread about 20 basis points. We continue to reduce the scale of this legacy business which peaked at about C$17 billion and is down to C$5 billion today. The securitization market now offers very reasonable margin. CIBC has industry leading capabilities in this area.

Therefore, we are now thinking to expand our presence for key clients in our conduit programs for assets that are consistent with the liquidity characteristics of these programs. We are also looking at opportunities to assist our clients in longer term assets securitization product. This strategy has already producing results. We've got a significant number of deals in the pipelines, including three specific transactions for about C$4 billion in total that we've either completed or in the process of completing.

Our foreign exchange business continued to form well and we believe it has the potential to be a strong and growing contributor to our future growth. We continue to build on our capabilities in the electronic delivery of capital markets products. We've recently hired a senior professional with direct international experience in e-commerce to lead us in this initiative.

In our cash equities business, we are leading the industry in equity trading market share by value executed and by trades executed on the TSX in the calendar year 2009 and we've also seen strong equity new issue activity in the quarter.

So, in summary, last year we told you about our new strategy and what we intended to accomplish in 2009, and we are beginning, we believe, to see this reflected in our results. There are many opportunities ahead to grow our business and we are optimistic about the future.

Now, I'll turn it back to John Ferren.

John Ferren

Thank you, Richard. We are ready to take questions on the phone.

Question-and-Answer Session


(Operator Instructions). The first question is from Steve Theriault from Bank of America. Please go ahead.

Steve Theriault - Bank of America-Merrill Lynch

Sonia, the retail NIM was quite a bit higher this quarter. Can you talk a little about sustainability and what the biggest drivers were in Q3 to that improvement?

Sonia Baxendale

Yes, the primary factor in the retail NIM was reprising on credit and the prime BA on that front. So, I would expect it to remain pretty much in line with where it was this quarter on a go-forward basis.

Steve Theriault - Bank of America-Merrill Lynch

Another quick one if I might. The US real estate finance exposure looks like it was about C$2.4 billion, probably a question for Tom. That split between, what you are calling a construction program and an interim program weighted quite heavily to the interim program. Should we think of those as any different or are they really just construction lending exposures?

Tom Woods

They are a little different. I mean, construction is just as the name implies, it's starting from scratch. Interim is a little lower risk and that it's generally renovation, refurbishment where there is already lease up, but they are generally both pretty low risk given the relationships we've got with the sponsors and the locations, but interim is just one step further along.

Steve Theriault - Bank of America-Merrill Lynch

If I could squeeze one more in just on the card securitization, I know that card securitizations were down about half a billion or so I think on the quarter, so anything going on there, anything that you would like to highlight or is it just timing or a replenishing issue with respect to those structures?

David Williamson

No, nothing, Steve going on there particularly just the rolling off; just maturities.


Thank you. The next question is from Andre Hardy from RBC Capital Markets. Please go ahead.

Andre Hardy -RBC Capital Markets

I just want to start with a clarification. I hear the comments that business loan losses are expected to decline from the current quarter on page nine of the report to shareholders in the outlook section. There was a comment about Wholesale Banking provisions expected to increase. Are we just dealing with a different starting point or did I mishear something?

Tom Woods

We had to repay exactly 22 quarters where we've had essentially no loan losses in the state driven by the de-risking that we started in '02, '03. This quarter, although we do a very detailed review every quarter, we did a particularly detailed review this quarter and we've had an unusually high number, I think, it was a C$129 million.

Now, about 83 of that within our run-off book, but even apart from that, a number of the loans that we impaired and this is reflected in the incremental allowances which have been put on at a comparatively low level, I think reflecting the quality of these impairments being better than the rest of our book. As we look out over the next two quarters and I've got a caveat this as I said in my comments. There is event risk in many of these but we look at that number we booked in Q3 and see at the moment, considerably a lower provisions going forward in the next two quarters.

Andre Hardy - RBC Capital Markets

Okay, so the report to shareholder is probably just using 2008 as a starting point whereas your comments are using Q3?

David Williamson

You are looking at the outlook for 2009; I think you are absolutely right. That's really looking at 2009 relative to sort of longer term trends and what Tom's comments are more the quarters he sees coming up relative to this quarter.

Andre Hardy - RBC Capital Markets

The other area I want to address is on page six of the sub-pack and it's the treasury allocation to the Retail division, where, if we were to look at the Q3 '07 and Q2 '08 experience and some of the subsequent quarters versus what we're seeing now, there is a big change. There's always going to be moving parts here, but are there any permanent things that would suggest lower treasury allocations? Some of the early private securitizations that you've done which might suggest at a lower treasury allocation in the past or should we just kind of take an average here and stick that in our models?

David Williamson

I'll make a couple of comments. So one vis-à-vis retail and treasury, this particular quarter, whether it's on a comparison to last year or comparison this quarter or the preceding quarter, treasury hasn't had a market impact on retail. It impacts retail in different places, but I'm talking about treasury allocations to total retail, it's not a market impact.

However, I think you're broader question, Andre is kind of what's the trend line on treasury and how will it impact the bank and other elements of the bank this quarter and the quarters going forward? Is that fair to say?

Andre Hardy - RBC Capital Markets

Just I'm trying to figure out is were there decisions that didn't work out that were near-term decisions or were there some decisions whereby you might have crystallized some of the high wholesale funding costs that we've seen?

David Williamson

On a year-over-year basis overall treasury results, we've seen last quarter and this quarter are declining, like there total treasury revenue is lower, and your right on the markets to the cause of that. Funding costs in the market place we see more recently are declining. What we're seeing in treasury is the impact of some the actions that we've taken over the past two years to strengthen our balance sheet, from both the capital and liquidity perspective.

Actions that are consistent, we've talked about in prior conference calls were our status strategy to enhance capital and enhance the balance sheet. So these actions they have been very positive for the balance sheet and to our overall quality and have been very good for our capital and our liquidity position. However, there is a lag effect in terms of the costs of these initiatives hitting our P&L in this quarter and for some quarters going forward.


Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead. Mr. Goldberg, your line is now open.

Michael Goldberg - Desjardins Securities

I have a couple of questions and maybe I'll just stick with this theme on treasury and what seems sort of curious and maybe you can explain it is, how you could have lower treasury revenue in an environment of such a steep yield curve in both Canada and the United States?

David Williamson

Michael good point and I think there's opportunities that we and others and seizing to I think benefit from that yield curve and that could very well impact future treasury results and mitigate the comments that I just made to Andre. I think Andre's comments for, treasury results lower this quarter, lower last quarter what's going on and to that, I was just saying, we did take action to strengthen our balance sheet.

We did take action over the two year period and that did have costs because, some of the raising was during period of higher credit speared. That's embedded in our book and we'll feel that for some period of time. You're right, Michael, there is a upper split in yield curve that provides opportunities and the strength I think of our balance sheet and capital position will allow us to participate in that opportunity.

Michael Goldberg - Desjardins Securities

To what extent do you think, you would take positions or leave yourself sensitive to rates on the yield curve?

David Williamson

Michael, I think give me a chance at this point to hand over to Gerry and maybe he could offer a comment or two, as well.

Gerry McCaughey

Michael, David has I think given a very good historical reference to the impacts that are taking a conservative funding posture might have through the last period of time, particularly when the issues around the marketplace were at the highest level of stress.

Inline with our risk posture at CIBC, we did elect to take advantage a variety of funding opportunities during that period of time, and we took advantage fairly early on some of those funding opportunities, when the wholesale markets were not open we went to the securitization market, and did execute a number of transactions that freed up a fair bit of liquidity.

Although, we're not necessarily at the peak price they were more expensive than usual. Those will run-off as David said overtime. When it comes to the topic of the yield curve it's actually kind of interesting because, there was a period of time when you had a very steep yield curve, but it was dependent on whether or not you were willing to go sovereigns or credit related.

It's fairly recent that if you wish to tend towards the sovereigns or in the direction of the sovereigns that you had the type of steepness that, you have today. Very simply put, if you'd used in the US side, the 10-year US was at 2%ish at its low and touched 4%ish recently, and as now I don't have it at the top of my head, but I suspect it's in the 350ish range.

One of the elements of any gapping that one might do is that needs to be considered is, what level of credit risk that you wanted to take into your gapping and our preference has been in this area. First of all, to be very balanced and to take a somewhat laddered approach, but also we had possibly more hesitancy than the market place in terms of gapping outside of sovereigns, due to the risk posture that we wish to maintain.

In recent periods and particularly the developments in the latest quarter the opportunities to engage in some gapping has increased in the area of sovereigns because the yield curve of out to two, over five on the sovereigns has improved dramatically. In that circumstance, I would tend to agree with you that the capacity to GAAP overtime would improve your overall funding posture.

I think that one of the key elements that I wanted to discuss here, David, I'll turn it back to him in a second to conclude, there is an issue not just of treasury here in terms of what David's reporting on, there's a cross bank issue in terms of how we look at a steep yield curve and what type of securities we may or may not wish to be engaged in, when we are doing any form of gapping.

So what that would say is that, anything that we have been involved in, has been somewhat more recent than the discussions that you would have seen in the media about the steepest yield curve available ever. We did not see it as being that steep when it came to the sovereign area. It was very steep on very high quality credit product and there is only so much that one can do in that and the question is whether or not it moves the dial.

In the very high quality credit product today the way you would mix it in with the sovereign if you were to gap would be that you would probably do your gapping against sovereign and towards the highest end of credit quality or sovereign surrogates and what you would do is you would probably use the credit asset today only on a floating basis so that you collected the credit rather than the interest rate risk.

The other element here is that the securitization marketplace when it comes to basic elements such as CMB securitizations for the Canadian marketplace. That is an area that we have always been active in. Not all Canadian banks can do that, but over recent years we adopted the policy of number one, insuring as many of our mortgages as we could and then having them pool ready and we have been on a consistent basis a securitizer to the CMB program.

There was a period of time when the combination of mortgage pricing as well as funding costs, so what we could obtain in the spreads that were charged through the securitization program led to putting mortgages into those programs and not having gains out of those types of securitizations. Normally, you do have gains because you are front ending your profitability on your mortgages to a certain extend when you securitize. That is an issue that has more recently normalized and when I say more certainly, again I am saying we find that it is very recently that it has normalized where we have two elements both a supply of well priced product for the securitization and the pricing that we are being charged in the securitization has come into line.

So, you should see what used to be a steady flow of securitization in that area that produced some form of [bull] loss in the securitization line. That is something that I think might improve. So the answer to both of your questions are, there have been some changes in what the flow is after securitization, as well as a cross bank element of choices that we make around GAAP to go beyond treasury.

I'll turn it back to David now.

David Williamson

A fairly robust answer, I don't think I can add too much for that, thank you Gerry.

Michael Goldberg - Desjardins Securities

I had another question for Sonia. Hello?

Sonia Baxendale

Yes, Michael.

Michael Goldberg - Desjardins Securities

Could you tell us if the growth in your new high interest deposit product came from money market funds and if it did, what's the impact on contribution?

Sonia Baxendale

It came from a number of places. Some of it came from money market, some of that came from straight deposit accounts. A fair amount of it came from entirely outside of the bank. So it was a broad mix. Any of that came from money market ultimately those funds would have migrated elsewhere as they already had been prior to the launch of that savings account just given the rates to customers. So, its not a -- it wasn't -- you could leave it in money market and it would stay there, it was a case of the funds would migrate regardless and would they migrate to a product we had or would they migrate outside of the bank.

Michael Goldberg - Desjardins Securities

Just the movement in to that new product accounts for much of the five plus billion dollar increase I guess it's about a five plus billion dollar increase in your personal notice deposits during the quarter?

Sonia Baxendale

Yes it does. The other items that were to account for the increase is the tax-free savings account and our unlimited checking accounts as a result of our campaign, but the largest share would be from that new account.


The next question is from Brad Smith from Blackmont Capital.

Brad Smith - Blackmont Capital

Just another question Sonia for you. You made some reference to the trend in delinquencies in that credit card portfolio. I was just wondering, are there actual numbers you can provide us with respect to those trends, just to give us an idea where you are at and where you started the year at?

Sonia Baxendale

Why don't I pass over to Tom in terms of the actual numbers on that? What I can tell you is every month throughout the quarter, they did continue to improve and the total would be about 12 basis points improvements. Tom may be able to provide additional detail about that.

Tom Woods

Yes, Brad it is Tom. My colleague here is just pulling them. Maybe Ferren will let you read them. These are actually public numbers, files in connection with their securitization, which are essentially undivided interest in a broader pool. Are you guys ready now, or do you want to come back?

John Ferren

I will take that. Now Tom, in terms of our delinquency our cost per cards is down about 1.3% range now, that would be about nine basis points within the quarter.

Brad Smith - Blackmont Capital

Okay, perfect, that's helpful. Then the only other question I had was with respect to the general provisions that you took. It seems that the bulk of that provision ended up, it looks like going into generals opposite of the credit card portfolio. So I'm just trying to reconcile the commentary of the improvement in the delinquencies, with the decision to increase the generals. So maybe getting some comments as to how you are determining your general provisions? How you determine, how much and when to increase those?

John Ferren

Hi this is Ferren again. You are right there. Our general allowance is just about C$42 million this quarter, C$35 million of that would have been against the cards portfolio and a good part of that would relate to the question that was asked earlier about the cards securitization maturities coming back on balance sheet. So in those maturities, the curve you have to reestablish are general allowance. So about 15 million of that increase would be related to the securitization.

Otherwise we have both of qualitative and quantitative approach to creating our general allowance. We look at both our delinquency trends but also bankruptcy trends in the portfolio and we review our methodology with our external auditors from time to time and I would say in terms of the qualitative component given the external environment, we've maintained a conservative stand at this point in time and that changes each quarter as market developments occur.

Brad Smith - Blackmont Capital

So I guess, safe to say, it would be a fair amount of discretion in established in the dollar amount at any given quarter?

John Ferren

To a certain degree of discretion for sure. Our methodology is linked back to our Basel II methodology, which have looked at the credit scores of our portfolio, Probability of Default distribution and Loss Given Default distribution.


The next question is from Sumit Malhotra from Macquarie Capital.

Sumit Malhotra - Macquarie Capital

Good afternoon, start with David on Note 10 for the report to shareholders. I was just thinking about the tax reassessment. If I go back just three quarters, the bank had a C$486 million tax recovery associated with that file. I'd just like to know that at time when that recovery was taken back into earnings, was there consultation with the CRA at that point? I would think there would have to be in order for that to make its way to the income statement, and if that was the case, why has this reappeared in such a short order of time in terms of a potential reassessment.

David Williamson

Jeff, to answer your question, what was done back in Q4 is just what it should be with the valuation of what should be in our accounts, vis-à-vis this filing on Enron and our evaluation of it, and not having had some discussion, brokered kind of arrangement with the CRA. It's just us evaluating our perspective on what we should have on the books. So, just speaking to what the development is in this particular quarter and obviously you referred to note 10 and we've provided a fair amount of information there. So, I'd guide you or others to that information.

However, I'd say, it's not surprising to me at least that the government would want to continue the process of discussing or debating the issue through a reassessment given the size of the balance involved. So the step of having a reassessment arrive right now is not frankly a surprise as how this process will evolve. A second comment I'd make is that, in our disclosure, we've noted our view which continues to be our view, which we believe will be successful and sustaining at least the amount that we have recorded as far as our accounting tax benefit that's in our books to-date, including what was booked in Q4. Beyond that, obviously, I'm not in a position to say much more because the matter is evolving and now that a process is commencing in some respect, and it's now between us and the CRA to see this through.

Sumit Malhotra - Macquarie Capital

The thing is David, and obviously, I know we can't say too much, if I go back four years ago to when this charge was taken and maybe, Tom, who was in your role at that time could speak a little bit more on it. At that time the tax savings if I can call it that associated with this expense were quite low, and it was something that we have been told would have to be discussed with the CRA. So, to hear that the Q4 recovery was at the banks discretion is almost what it sounds like you are saying. It seems strange just given what we had heard four years ago when this was first set up.

David Williamson

This obviously has to be at our discretion to what we put in our accounts, but I think the best way to look at it is, these things evolve, so there is the event, there is the initial filing. My point being, not that we never talk to CRA regarding years that are open and subject to assessment. Those discussions do continue and through that we get a sense of how they are auditing our account and our confidence will expand or diminish through that process.

So, I didn't want to leave the impression nor was this a right impression that the Q4 adjustment was as a result of the specific discussion with CRA, where they authorized or supported or whatever with respect to what we did then. What it was more a case of is that, [Dennis Delugen] and our tax team are continuing to work with CRA as they normally do through assessment, and it's their view as to how we feel about how the account or the filing is going to play out.

Sumit Malhotra - Macquarie Capital

Lets leave it there and move over to credit; one for Tom Woods. If I look at the items that drove provisions higher on business lending, obviously, leverage loans and real estate, we see the real estate, construction, consumer goods and publishing being the bigger line items; certainly a large increase in those three categories for both provisions and non-performing loans. I did not see very much in any of them on your net charge-offs page. Is this a timing issue Tom and that were between the 90 and 180 day period or is there some measure of security that perhaps you can talk to here.

Tom Woods

It's really timing and it's not so much 90 or 180 days, as it relates to corporate loans, you make provisions based on judgment as to collectability. Charge-offs occurs when there is a very high degree of certainty on collectability. These provisions as I said earlier were particularly high in Q3 and they are going to play out, and in some cases to be frank, we are in recap discussions with these borrowers and we'd expect to get some of that money back through the P&L, but in another case obviously, we'll have to go to write-off. It's really a question of timing and it will be typically some number of quarters before we resolve the charge-off outcomes.

Sumit Malhotra - Macquarie Capital

That was really my point the fact that the provisions have been taken now, the charge-off hasn't. There are still in your view a decent opportunity to get a chunk of that back?

Tom Woods

I don't want to leave you on too much. I mean, generally speaking, when you make a provision you get some recovery but you don't get a large percentage. There is often some percentage back, but it's really a timing question. If history repeats itself, we will get some back, but I don't want you to conclude that we are going to get a lot of it back, because that rarely happens.


Thank you. The next question is from Mario Mendonca from Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Tom, just a very quick point of clarification. When you where concluding your comments, your opening comments, you concluded with something like, something else, we have a positive outlook on. Was it the corporate that you saw positive on a going-forward basis or was it on the consumer that you felt positive going forward.

Tom Woods

Both, personal and secured, and I am comparing that with the reported provision in Q3 as well as the corporate. Let me just read the sentences. The line may have broken up. The outlook for other unsecured personal loans, i.e., other than cards, and corporate loans is positive relative to Q3. Now, that shouldn't be terribly surprising, particularly on the corporate side given the historically large number we booked but we wanted to just give you some comfort that. I had a bunch of questions through the day which I've put off until it's webcast about how we saw the future, so it was relative to that Q3 booking in both unsecured, personal and corporate.

Mario Mendonca - Genuity Capital Markets

Other than cards?

Tom Woods


Mario Mendonca - Genuity Capital Markets

For cards, you said you felt that the write-offs could decline going forward but that allowances could still increase because of bankruptcies and unemployment. Is that fair.

Tom Woods

I didn't that say. I got to really reiterate the caution here. Typically we haven't given guidance on provisions just because it's the transparency or the visibility rather is harder to pin down, but I know there is a lot of interest in there. So our view is, on cards, we are going to see relative stability versus admittedly high number in Q3, just given the current unemployment, bankruptcy situation.

We have relatively low increases to the allowance in Q3, but bankruptcies were high. So, although I didn't say this, I will say it now, which is essentially what you said, Mario. Changes to the allowance in Q4/Q1, if I had to make an estimate are probably going to be a little higher than the number we booked in Q3. We should start to see the benefit of these stable and now improving delinquencies that Sonia and I both referred to.

Mario Mendonca - Genuity Capital Markets

On the right-offs?

David Williamson

That's right.

Mario Mendonca - Genuity Capital Markets

That was how I interpreted it, before but thanks for your clarification. One final thing and if, I know this could open us up to a much broader, maybe even longer discussion, but if we could briefly touch on, just the speculation that CIBC would look as far foot as across the Atlantic. Given everything that's going on at the bank and the decisions rate made over the last few years to exit the UK and exit the US.

Should we even entertain the notion that CIBC would consider looking at taking an important position in the bank in outside of Canada or outside of even North America, is that a reasonable thing for us to understand?

Gerry McCaughey

As we've stated previously and I repeated today, our first priority is to strengthen our core businesses and to manage down our structured credit exposures and continue to prudently deploy our capital base, keeping in mind the risk environment that we have out there. In terms of our core businesses, the opportunities at this time are very interesting within the markets that we are in.

I would like to just touch on that for a moment. We are, as both Sonia in commercial banking and Richard referred to in terms of his corporate lending activities and securitizations, finding that the capacity to deploy capital in the asset, asset environment that we've seeing today is quite healthy. We do expect that to continue.

One of the important reasons why we expect that to continue in the near-term is that in the low nominal rate environment and it could go up a bit from here and it would still be a low nominal rate environment, it is possible now to engage in investment in assets, securitizations, corporate lending, commercial lending, where our clients are receiving some of the best nominal rates that they have received in terms of doing business with us.

At the same time, because of the low overall rate environment and the lower cost of funding, we can properly price these asset investments for the risk and profitability that we require. That environment where the balance between a healthy environment for our clients to borrow at good rates, while that's throwing off good risk adjusted spreads for us, in our core market places its something that is our primary interest.

Furthermore as you have heard both Sonia and Richard talk about there are areas where CIBC either because we were absent from them in the past, due to a gap in our business or because we reduced our exposures there due to the risk characteristics and what we viewed as poor pricing characteristics, there are areas where we do have extra capacity to invest in assets in the market place.

Just picking one example, Richard touched on the area of securitization. We have reduced our conduit business more than, I believe any other bank in Canada, not because of the credit characteristics of the conduit business, but because, of the liquidity characteristics C$17 billion of our asset conduit in the way that they were funded which was consistent with the industry. We did not believe we had the right liquidity and profitability characteristics.

It took two years, but we've run those down now to C$4 billion to C$5 billion and there are a number of those we will maintain for core client, but, what we are finding and we have been researching and working on for several months is that, there is a need in the market place for securitization and I said, this is just one example, but we are finding multiple opportunities in our core markets.

There is a need for securitization and we are willing to take it on balance sheet if it is at the right price. We are actually willing to do transactions individually tailored to our clients that have very healthy spreads and the right liquidity characteristics because their term and we can match, fund them, if we wish.

Given that we have enthusiasm for the current opportunities within our core market place and that the core market place does require both investment of capital and funding to take advantage of these elements, as well as, in our core businesses in the Retail area and in the Wholesale business, we want to make most physical, technological and talent investments.

Our primary investment is in our core businesses, and that will, we believe throw off over the next several years, a level of returns that will hit CIBC strategic imperative of consistent and sustainable performance. When one goes out beyond several years, and presumes that we are successful in the activities that I just described, which have been well knocked out internally and are very strategic in our core market.

If one presumes that we will be successful in that, the calculations of the returns that we can get by both expanding our asset base, as well as, repricing the existing utility asset bases that we have, we would be in a position, and we believe, may in the near future, be in a position of throwing off excess capital, subject to the prudent that I talked about in the existing marketplace.

We are starting from a 12% Tier 1 ratio, therefore, we believe that it is necessary for us to stay abreast of developments in the marketplace and to be looking at the markets where we are or maybe able to be involved.

We have been looking throughout as I said in the past, in for the last three or four years, I have made multiple visits to the US to many institutions in order to stay abreast of developments, pricing and opportunities and in every circumstance, we found that, we were not able to reconcile the strategic path these asset would give over the price. We also have stated on several occasions that we are open for business in the Caribbean for consolidation within that area.

We are in 17 countries and we have added small exposures there. We are looking actively from a research and development viewpoint to make sure that we have the right platform in the future, so that, if we have the means, i.e. the excess capital and confidence within that we got our core businesses nailed.

If we have means to invest that we have the right opportunities and the pipeline to make sure that you have you those opportunities, is something that you must build. So you have a variety of items in the pipeline and it takes a long time to build a good pipeline.

So that's a very, very long way of saying that our core business right now is our area of focus and we believe that investing in that will throw off the most reasonable returns of the opportunities that are out there today. At the same time, strategically if one presumes that you will do well at that, we need to continue our research and development and build our capacity to ensure that we have outlets for our capital in the future and we are doing that on a regular basis and have been for several years.

Mario Mendonca - Genuity Capital Markets

Very briefly then, would you take a minority stake in a company now to prepare for that time in the future when you're successful and are spitting out excess capital. Would you take the stake now so that you're ready for it later?

Gerry McCaughey

I think that one of the things that I'd like to do is avoid specificity as to the means and I'd like to focus on the opportunities because rightly or wrongly so, if I was specific as to the means, I think that people may read more or less into the response. Let me talk about the opportunities out there and the variety of ways that one can participate. There are opportunities many jurisdictions that we have and are looking at. One of the elements that is very important to us in anything that we do is that there is at the same time as we are becoming involved, that there is an element of first and foremost, making a decision around whether or not the better investment is assets or institutions. It's something that you've heard me say the past and I continue to say that.

In the US marketplace one of the things that we have found as we have looked through a number of institutions is, we have found that there were assets that we understood extremely well, particularly since they required financing on a funding subordinated basis and that the returns that we could expect with a level of do diligence we were able to conduct and a much lower risk point were higher through engaging in asset investment rather than institutional investment due to the uncertainties that were involved, as well as the fact that it is not necessarily a game for those who are not fully involved and we are not deeply involved in the US due to the fact that programs that are available through governments are critical to understand in terms of investing in the environment in the US

Therefore, our tendency in the US marketplace for instance would be to buy assets rather than institutions or under certain circumstances to invest through partnerships with others elements like that and may include things like investing in certain funds or co-investing and that is a possibility. Elements such as co-investing carry with them a different characteristic than a minority interest does, because there are quite dramatically different regulatory requirements, when one looks at investing through intermediaries such as a fund or investing as a [side-card] co-invest.

In any event the key element to that is, and I'm talking about the US marketplace, would be that is you did so you'd have to decide beforehand what your objective was and our objective in a case such as that would not necessarily be a path to a greater involvement. It would be to be involved with good investment characteristics and a hope for payback but also the same time being involved in the market place from a view point of building greater contacts with most knowledgeable people in the market place who have the greatest capabilities of doing due diligence, do understand the most about the redeveloping regulatory environment, as well as the programs that are available from the various governments as to troubled institution acquisition.

So I think I had answered your question generically without trying to pigeonhole myself in to the answer meaning more or less then I intended. Does that work for you?

Mario Mendonca - Genuity Capital Markets

It does, thank you.


The next question is from Ian De Verteuil from BMO Capital Markets.

Ian De Verteuil - BMO Capital Market

Thanks I am referring to page 24 of the sub-pack, the delinquency data. When I look at the card business this is the second quarter that the aggregate delinquencies are down. I mean those have sort of been up and down in all the various buckets. I would have thought that with the greater than 90 day bucket being down, that your charge offs would have been down as well.

So that's one thing and the second I would have thought, with the overall delinquency sort of impaired but not yet, perhaps you would not impair with those declining for two consecutive quarters, I am surprised that you still have to build reserves against that. Am I missing something Tom in terms of what I should be linking charge-off and the allowance has reserve built too.

Tom Woods

No Ian I think your inference is quite correct, but there is another part to it and that is bankruptcies and along with that is, even though our delinquencies on the face of it are declining, we've had a slightly higher sort of roll rate through to the 180 days in terms of collectability. So although, in Q3, we had a relatively low need to build up the allowance, because we built it up a fair bit a few quarters before that, bankruptcies were fairly high. It sort of feels like and this is why I am only saying that the outlook for Q4 -Q1 is for relative stability, it could even go up marginally. It's because, even though delinquencies on the face of it in percentage terms are stable in Q2, slightly better in Q3, slightly more of those delinquencies are rolling through to 180 from a collectability point of view and bankruptcies are a little higher. That has more than offset what you would otherwise think would be somewhat improvements due to the percentage bankruptcy coming down.

Ian De Verteuil - BMO Capital Market

So when I think about the consumer bankruptcies which I look at, it doesn't seem as if the consumer bankruptcy rate has really moved for four months here. Am I missing something? Isn't it just the consumer bankruptcies that we get from, I see sort of 10,000 running a month. Is there any other thing I should be looking at there? Because it doesn't look as if it has changed much in four months now?

Tom Woods

Yes, I don't know whether we have those industry statistics. Do you have them handy?

Ian De Verteuil - BMO Capital Market

Maybe it's your own, the numbers you see internally and not those, but is there anything we could look at to give us an indication of what's going on with the book? Because it looks as if the delinquencies can go down, but then the charge-offs can still go up?

Tom Woods

Okay. I will hand it over to Sonia. Let me just reiterate. Delinquencies can go down, but if a slightly higher component of those actually flows through to 180, the charge-offs do go up. Bankruptcies in our case were a little higher, and if in fact the industry data is flat, that means our bankruptcies were slightly higher than the industry. Sonia, do you want to add to that?

Sonia Baxendale

A couple of factors here. One is when you look at the provisioning, the modeling is based on a 12 month average, and so it is a lagging indicator, so that would be one factor that you should consider. The second is, on delinquency, it goes from 30 day to 180day cycle, which is why I emphasize improvements in both early and late stage delinquency, because the key in improved write-off is improved late stage delinquency, which is what we have experienced in the third quarter. So, that's what would drive decreasing write-offs from the flow of these delinquencies. So, what you would expect there is exactly what you've described. The third part that I would highlight is bankruptcies. Our actual bankruptcies would be exactly in line with the industry measure of bankruptcies based on the data that we see out of the main industry.

Ian De Verteuil - BMO Capital Market

Sonia, three points you mentioned there. You have a 12 month roll, so to the extent things have deteriorated in the last six months, that's a negative. On delinquency, the news is good because your late stage delinquencies are getting better. The third, you would say your bankruptcies are pretty much on the industry average?

Sonia Baxendale


Ian De Verteuil - BMO Capital Market

The second question comes back to Sumit's question on the tax issue. In your annual report, you talked about the fact that you had actually entered into negotiations with CRA to resolve the Enron tax matter. I'm surprised that at year end, you would have already been in negotiations with them, would have released to C$0.5 billion of reserves and then how would be reassessed nine months later. I mean how could I not interpret this as the relationship or things have changed for the worst or it's less favorable today than it was nine months ago?

Gerry McCaughey

I think all that's happened today is the next kind of step in a process on the balance that fairly substantive which as we've filed the return back 2005 and some number of years later, we have been reassessed and than in fact, not formerly reassessed, we've had a draft reassessment. Once, we get the formal reassessment, we'd be in a position to, continue to process and we'll debate our points and go over this we'd likely go. I'm not too sure I followed your other?

Ian De Verteuil - BMO Capital Market

I guess well my point is this, if I was in a debate with the CRA and I knew I may get reassessed, I wouldn't book you know C$0.5 billion gain if I knew I could reassessed. However, what you are saying is you took the C$0.5 billion and you knew you might get reassessed anyway. Isn't it normal that you would just say well don't bring in, don't book C$0.5 billion profit if you could get reassessed and if you'd know that's a pretty real, not even a probability, it's nothing about possibility it's a probability?

Gerry McCaughey

No I think Ian this is slightly different perspective, even at the beginning, we booked about 30% on this. I think, when we booked the 30%, given it is a C$1.0 billion amount, that we probably would have been anticipating then that a reassessment would be probably highly probable and then at the end of Q4 of last year, several years of review of our case, internal discussions and external law firms also gave us a good opinion about our perspective and prospects. We got that in Q4. So at that point, we looked at our situation and booked what we thought, again, was the right value to have on our books on this, again anticipating the most probable outcome wasn't that the government would write us a note and say, we couldn't agree more and your filing is going through as you put it. The anticipation would be that, for an amount such as this, there would be pretty probably a reassessment and a process thereafter.


Thank you. That concludes the question-and-answer session. I would like to return the meeting over to Mr. John Ferren.

John Ferren

Thanks, everyone, for joining us and we look forward to talking to you again at the end of the fiscal year. Thank you.

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