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Canadian Imperial Bank of Commerce (NYSE:CM)

Q3 2014 Results Earnings Call Transcript

August 28, 2014; 08:00 AM ET

Executives

Gerry McCaughey - President & Chief Executive Officer

Kevin Glass - Chief Financial Officer

Laura Dottori-Attanasio - Chief Risk Officer

Victor Dodig - Senior EVP & Group Head - Wealth Management

Richard Nesbitt - Chief Operating Officer

David Williamson - Senior EVP, Group Head - Retail & Business Banking

Geoff Weiss - Senior Vice President, Investor Relations

Analysts

John Aiken - Barclays

Gabriel Dechaine - Canaccord Genuity

Robert Sedran - CIBC

Sumit Malhotra - Scotia Capital

Peter Routledge - National Bank Financial

Sohrab Movahedi - BMO Capital Markets

Meny Grauman - Cormark Securities

Darko Mihelic - RBC Capital Markets

Mario Mendonca - TD Securities

Derek DeVries - UBS

Operator

Good morning ladies and gentlemen. Welcome to the CIBC, Quarterly Results Conference Call. Please be advised that this call is being recorded. To reduce the audio interference, please turn your blackberry off for the duration of the meeting.

I would now like to turn the meeting over to Mr. Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead Mr. Weiss.

Geoff Weiss

Good morning and thank you for joining us. This morning CIBC senior executives will review CIBC's Q3 2014 results that were released earlier today. The documents referenced on this call, including CIBC's Q3 news release, investor presentation and financial supplement, as well as CIBC's Q3 report to shareholders can all be found on our website at www.cibc.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer will follow with the financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with the risk management update.

After the presentations there will be a question-and-answer period that will conclude by 9:00 AM. Also with us for the question-and-answer period are CIBC's business leaders, including Victor Dodig, Richard Nesbitt and David Williamson, as well as other senior officers.

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. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially. 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 Gerry.

Gerry McCaughey

Thank you Geoff and good morning everyone. Before I begin, let me also remind you that my comments may contain forward-looking statements.

We announced our third quarter results this morning with reported net income of $921 million, up 5% from the same period last year. Adjusting for items of note, net income was $908 million compared to $931 million in Q3. On a per share basis adjusted earnings of $2.23 compared to $2.26 in the same period last year.

For the period ending July 31, 2014, our Basel III common equity Tier 1 capital ratio remains strong at 10.1% and our adjusted return on equity was 20.7%. On September 5 last year we entered into a normal course issuer bid to purchase for cancellation, approximately 2% or a maximum of $8 million of outstanding common shares over a 12-month period. With the buyback program due to expire on September 8, 2014 we intend to renew the program under the same terms for another 12-months, subject to approval from the Toronto stock exchange.

Turning to the results from our business units, Retail and Business Banking reported adjusted net income of $597 million compared to $628 million in Q3, 2013. The 5% decline reflects primarily impact from the sale of 50% of the Aerogold portfolio, which closed in Q1 2014. Excluding the sale adjusted net income was up 4% compared to the same period last year.

We continue to invest in strategic initiatives to strengthen our franchise. This quarter we commenced national rollout of our multi products sales origination platform, which was being worked on over the past two years. Early results have been positive resulting in deeper relationships and a better client experience.

We also continue to invest in mobile innovation, which is resonating well with our clients. CIBC’s focus on innovation has put us at the leading edge of mobile banking, being the first Canadian bank to introduce mobile cash management, mobile payment and e-deposit apps for Smartphones. Since its launch in 2014 more than 1 million cheques have been deposited using our eDeposit app, proving that clients embrace the convenience of making cheque deposits by taking the picture with their mobile devices.

The development and launch of new products also demonstrates our commitment to innovation. During the quarter we launched the CIBC Double Double Visa Card with Tim Hortons. This first-of-its-kind two-button technology combines the CIBC credit card with the Tim Hortons reward card. The distribution of this card is structured to leverage the broad distribution network of Tim’s 3,500 plus locations across Canada, while embedding cross-sell opportunities in the client experience to ensure new clients are connected to CIBC. Early results indicate that this card will be very popular with our clients. David Williamson is here this morning to answer questions about Retail and Business Banking.

Turning to Wealth Management, Q3 2014 adjusted earnings were a record $124 million, up 20% from the same period in 2013. As we continue to execute on our strategic priority to build our Wealth Management platform, our client-focused strategy is gaining traction.

At CIBC asset management, a significant milestone was achieved with $100 billion in assets under management, and its 22 consecutive quarter of positive net sales of the long-term mutual funds. Atlantic Trust, the recent U.S. acquisition continues to perform well and was recently ranked the second highest luxury brand in the 2014 Luxury Institute survey of U.S. Wealth Management firms. Victor Dodig is here this morning to answer questions about Wealth Management.

In Wholesale Banking, Q3 2014 adjusted earnings of $254 million were up 11% compared to $228 million in the prior quarter. An improved equity issuance market and higher revenue from corporate banking and U.S. real estate finance contributed to a stronger third quarter. For the period ended July 31, 2014 CIBC was joint bookrunner on three transactions totaling approximately $6.2 billion and was the financial advisor on asset sales totaling $1.3 billion. Richard Nesbitt is here this morning to answer questions about Wholesale Banking.

CIBC has achieved solid financial results in the first nine months of fiscal 2014. We are delivering on our objectives of generating consistent and sustainable earnings for our shareholders. By staying focused on deepening client relationships and investing in the franchise, we intend to build on our progress of becoming the leading Canadian bank for our clients.

As previously announced, CIBC’s Board of Directors has appointed Victor Dodig as the next President and CEO of CIBC. I will officially step down as CEO when Victor Dodig transitions to his new role on September 15. Since the announcement Victor and I have worked closely together to ensure a smooth and full transition. I would like to take this opportunity to congratulate Victor on his appointment and wish him all the best as he leads CIBC in its next chapter of growth and development.

With that, let me turn it over to Victor.

Victor Dodig

Thank you, Gerry. Under your leadership CIBC has built a very strong foundation for long-term success, with a strong capital base, leading retail and wholesale banking franchises and a strong North American Wealth Management platform. I look forward to working with our senior executive team to continue to build on the momentum and successes that we have achieved. I am encouraged by the opportunities for growth as we accelerate our client focus strategy and look forward to delivering enhanced value to all of our stakeholders.

I would now like to turn the meeting over to Kevin Glass to review our financial results in more detail. Kevin.

Kevin Glass

Thanks Victor. For my presentation we’ll refer to the slides that are posted on our website starting with Slide 5, which is a summary of results for the quarter.

Adjusted net income for the quarter was $908 million, which resulted in adjusted earnings per share of $2.23, driven by strong results in all of our business. In our Retail and Business Banking segment we continue to see solid core operating results. In Wealth Management and Wholesale Banking we made strong contributions to our earnings.

During the quarter, we had the following items of note: We recorded a gain within an equity accounted investment in our merchant-banking portfolio of $0.08 per share. We incurred expenses relating to the development of our enhanced travel rewards program and in respect of the Aeroplan transactions of Aimia and TD of $0.02 per share. Amortization of intangible assets amounted to $0.02 per share and the structured credit run-off business generated a loss of $0.01 per share. In aggregate, the impact of these items on our earnings netted to a gain of $0.03 per share.

The balance of my presentation will be focused on adjusted results, which exclude these items of note. We have included slides with reported results in the appendix to this presentation.

So moving to the details for each of our strategic business units, I’ll start with the results for Retail and Business Banking on Slide 6. Revenue for the quarter was $2 billion, down 2% from the same quarter last year, due to the impact of the Aero transaction in Q1. Excluding this impact, revenue was up 4%.

Now looking at our individual lines of business, revenue in personal banking was $1.6 billion, up 5% compared with the same quarter last year. Performance benefited from strong volume growth across CIBC brand products and higher fee based revenue on increased mutual fund sales.

CIBC brand mortgage balances grew 15% or 12% excluding the benefit from FirstLine conversions. The conversion of the FirstLine mortgages into CIBC brand continues to grow very well. We continue to convert approximately 50% on renewal at improved margins. CIBC brand deposits were up 6% and mutual funds were up 22% year-over-year on strong net sales of $5 billion.

Business banking revenue was $389 million, up 1% from the same quarter last year. Volume growth was largely offset by the impact of lower spreads. Business deposits and GIC balances were up 12% year-over-year, which represented the strongest growth in five years. Business lending also continued to grow with average balance growth of 5%. The other segment had revenue of $29 million in the quarter, which was down $118 million compared with the same quarter last year, which is due to the impact of the Aero transaction.

The provision for credit losses in the quarter was $177 million, down 20% on a year-over-year basis. The decrease was due to lower write-offs and bankruptcies in the cards portfolio, the impact of an initiative to enhance account management practices, as well as the sold Aero balances. Both our consumer and business lending portfolios in Canada performed extremely well this quarter. Laura Dottori will discuss credit quality in her remarks.

Non-interest expenses for the quarter were $1.1 billion, up 5% from the prior year, primarily driven by our continued investment in growth initiatives, including expanding our sale force, as well as new product launches and innovations in mobile banking.

Net income for the quarter was down 5% from the prior year quarter. Excluding the impact of the Aero transaction, net income was up 4% year-over-year. Net Interest Margin or NIMs were largely stable, down slightly by 1 basis point sequentially.

Turning now to slide seven, wealth management had a record quarter with double-digit revenue growth across all businesses. Planned asset grew 31% from last year or 16% excluding the recently acquired Atlantic Trust. Revenue was $569 million, up $111 million or 24% from the same quarter last year.

Retail brokerage revenue of $307 million was up $40 million or 15% compared to the prior year due to higher fee based and commission revenue. Asset management revenue of $187 million was up $28 million or 18% from the same quarter last year. This was largely due to higher client assets under management, driven by market appreciation and strong net sales of long-term mutual funds. This quarter represented the 22nd consecutive quarter of positive net sales of long-term mutual funds.

Private wealth management revenue of $75 million was up $43 million, mainly from the acquisition of Atlantic Trust. Non-interest expenses of $405 million were up $80 million or 25% from the prior year, mainly as a result of the inclusion of Atlantic Trust mentioned earlier, as well as higher performance based compensation. Net income in wealth management was $124 million, up $21 million or 20% from the same quarter last year.

Slide eight reflects the results of the Wholesale Banking, where we delivered another quarter of strong earnings. Revenue this quarter was $619 million, up $10 million or 2% compared with the prior quarter. Capital markets revenue of $336 million was up $5 million or 2% from the prior quarter, as higher equity and debt issuance revenue was partially offset by lower revenue from equity derivatives and Canadian fixed income trading. Corporate and investment banking revenue of $278 million was relatively in line with the prior quarter. Higher equity issuance and advisory revenue was largely offset by lower investment gains.

The provision for credit losses was $6 million compared to a recovery of $1 million for the prior quarter, which was due to losses in the U.S. corporate lending portfolio. Non-interest expenses were $278 million in the quarter, down $39 million or 12% compared to the prior quarter, primarily due to lower performance-based compensation. Net income for Wholesale Banking was $254 million for the quarter, up $26 million or 11% from the prior quarter.

CIBC's capital position remains strong, with a common equity Tier 1 ratio of 10.1%, up from 10% in the prior quarter. Strong internal capital generation was largely offset by growth in risk-weighted assets, which increased by approximately $4 billion this quarter, due to parameter updates and business growth, including the RWA impact of the increase in the carrying value of the investment that was highlighted as an item of note.

To wrap up, we are very pleased with our core operating results. In Retail and Business Banking, good volume growth in core products drove solid results. Our Wealth Management franchise delivered record results this quarter. Client assets grew 31% from last year and CIBC asset management achieved $100 billion in assets under management. Both of our recent wealth acquisitions Atlantic Trust and American Century are performing very well.

In Wholesale Banking, our client-focused strategy delivered strong results across all business lines and we continue to effectively manage our capital resources and remain well position for the evolving regulatory and capital environment.

Thank you for your attention, and I’d now like to turn the meeting over to Laura Dottori.

Laura Dottori-Attanasio

Thanks Kevin. Good morning everyone. I’ll be referring to the risk section, which begins on slide 12. You’ll see that our third quarter loan losses came in at $195 million. This is up slightly from $185 million in the prior quarter and that’s on an adjusted basis.

On slide 13 you’ll see new formations along with gross and net impaired loans by geography, where new formations were up this quarter across both the consumer and business and government portfolios. So excluding last quarter, this is still the lowest we’ve seen since the third quarter at 2008.

As it relates to growth-impaired loans, they were down mainly due to decreases in the U.S. business and government portfolio.

If you turn to cards on slide 14, our net credit losses remain relatively flat at $102 million this quarter and our cards portfolio continues to perform well.

Slide 15 shows our Canadian residential mortgage exposures. The insured portion of our portfolio is 70% and 90% of the insurance provided by CMHC. The weighted average loan to value of our uninsured portfolio is 59% and condos would account for 11% to the total Canadian Mortgage Portfolio.

Through slide 16 you can see our condo developer exposure and as at July 31, our authorized loans to construction projects were $2.8 billion and drawn loans were at $1 billion, up from $791 million at the end of the second quarter. So our condo developer exposure remains diversified across about 80 projects.

Lastly on last slide 17, you can see the distribution of revenue in our trading portfolios as compared with VaR. We had positive results everyday this quarter, the same as the last quarter and our average trading VaR was $3.1 million; that’s down from $3.4 million last quarter.

I’ll now turn things back to Geoff

Geoff Weiss - SVP Investor Relations

Thank you. That concludes our prepared remarks and we'll now move to questions. Operator, can we please have the first question on the phone?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from John Aiken from Barclays. Please go ahead.

John Aiken – Barclays

Good morning. A question for David. We actually saw some solid performance in cards with average lending volumes up and then the fees up. David, can you give us some sense as to what you’re seeing in terms of the trends, the adoption of the new card and what your outlook is for the remainder of the year.

David Williamson

Certainly, John. So a few comments. We are seeing strong sales in our enhanced Aventura travel card. We continue to offer choice in travel with both the Aeroplan and the Aventura card. The net result is that in the travel card space, we are now seeing high single digit growth in balances year-over–year, so the travel business is definitely performing well. Attention now is swinging over to the non-travel cards to enhance that part of the business and the Tim Hortons Double Double Card that Gerry mentioned is part of that and we have other things that are planned.

The metrics I guess worth saying, when you’re seeing that much growth, the metrics for the new card sales are performing in line with expectations as far as utilizations or survival rates, that type of thing.

I guess a couple of other comments. I think you mentioned it John, if you look at the fee income on cards this quarter, up a fair piece, now that the launches have been successful and on the third quarter we’ve gone to normal points incentive, so that’s reduced the cost that we saw in the preceding quarters on points issues.

I think looking forward, as I mentioned we are going to be focusing on our non-travel cards book and reinvigorate it. We’ve got our exclusive presence at the Toronto airport that should prove helpful and we will continue to focus on choice and travel and enhance non-travel portfolio and use some of our profile we’ve got through our recent innovations in the Toronto airport to continue our growth.

John Aiken – Barclays

David, in terms of the legacy Aeroplan portfolio that you retain, can you give us some sense as to whether there was any material attrition or if you’ve been able to retain most of that or transition them on to other cards?

David Williamson

There’s been actually a little of both or all that, John. Some transitioning amongst our cards, some are going to other cards. There has been some new card sales, some attrition, so it’s somewhat early days. The new plastics are just kind of being launched now type of thing, so we’re still in an evolutionary state, but overall the books are proving to be fairly stable.

John Aiken – Barclays

Great, thanks David. I’ll re-queue.

David Williamson

Thank you. Thanks John.

Operator

Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine - Canaccord Genuity

Good morning. First question is on the mortgage business just want to tie into two items. The branch mortgage growth looked phenomenal, 3% quarter-over-quarter and I want to know also, but the FirstLine outlook, is there an expectation that that run off accelerates in 2015 and how that might affect your pricing strategies to replace those assets or defend your revenue line.

Gerry McCaughey

Hi Gabriel. Yes, let me just go through those in order. So the branch sales are quite strong. When we first highlighted we are going to exit FirstLine, we talked about what we had put in place or planned to put in place to make sure our branch sales were strong and there’s a couple of factors that are driving that.

One is, the mobile advisors were enhancing and building that distribution channel in a couple of ways. One is just size of and secondly, the breadth of what they can offer. So we are trying to give better tools to our mobile advisors to transition them from mortgage advisors to mobile advisors and they can offer more products, that’s going well. And in addition we’ve been working on our processes to make sure that our speed to decisions and speed to complete transactions is enhanced. So that’s helped ensure that we’ve got a strong branch platform.

Add I think I’ve highlighted it before. So we're achieving what we're achieving, not competing on price. So to your point about what we do on price, we will continue to not be aggressive on the price front and to a certain extent be a price taker in the market and try to win on distribution and service offering.

Regarding FirstLine, I think Kevin mentioned we’re still retaining about 50% of the book and obviously the spreads on our own brand of mortgages are substantively better than the FirstLine spreads, so that continues to help us. So branch sales are good and signs are they’ll continue that way and FirstLine retention is good and as far as pricing Gabriel, no intended change.

Gabriel Dechaine - Canaccord Genuity

I was thinking more along the lines of the duration of the FistLine book. Is it a year where you see refinancings or something like that. Just the runoff accelerate and if you still maintain the 50% retention, could that actually enhance the NIM benefit you’re getting next year?

Gerry McCaughey

Yes, I don’t see the runoff substantively changing. I think just continue at the pace it is now.

Gabriel Dechaine - Canaccord Genuity

Okay. My next question, Victor, your going to be CEO in less than a month. I’d like to get your view on CIBC’s capital management strategy. How you intend to balance acquisitions and share buybacks. Buyback programs are going to be renewed, are you going to be active in it, because we haven’t been recently, maybe not fair to ask you this early, but I still will.

Victor Dodig

Well, fair enough Gabriel. Thank you very much. So, a couple of points there on our capital management strategy. First of all fixing a long-term capital requirement given the continuing evolution of the regulatory environment be inappropriate at this time.

I will say that in the current environment we are comfortable operating in the 10% range when it comes to our Basel III CET 1 ratio. Our current capital position and the levels of incremental capital that we generate on a quarterly basis provide us with sufficient flexibility on a number of fronts and that’s to invest in our core business for a long term growth, which we are doing; to pursue acquisition opportunities that are aligned with our strategy, which would most likely be in Wealth Management as we’ve stated before; and to return capital to our shareholders in the form of dividends and through share repurchases; and on a year-to-date basis, 55% of our adjusted earnings have been returned to shareholders through dividends and share repurchase.

Gabriel Dechaine - Canaccord Genuity

So, will you be active in the buyback.

Victor Dodig

Well, we’ve announced a buyback today and I think we’ve been quite clear. I mean we are going to return capital to our shareholders. We are going to maintain a CET 1 ratio in the 10% range and we are going to have the flexibility to invest in our businesses, both on an organic basis and through acquisitions.

Gabriel Dechaine - Canaccord Genuity

Okay. Thank you, Victor, and everybody else.

Operator

Thank you. The following question is from Robert Sedran from CIBC. Please go ahead.

Robert Sedran – CIBC

Hi, good morning. David, if I think of the margin in your business excluding Aerogold on a year-over-year basis, would it look more similar to the sequential performance, sort of flat to down a basis point.

David Williamson

Yes, it would Rob. The year-over-year is Aeroplan, so other than that it would be flat to down a basis point. This quarter is seasonally one where the cards portfolio generally is low as people off their cards from the Christmas time, so that down a basis point is kind of cards related, so net-net the short answer is yes, it would be.

Robert Sedran – CIBC

Okay, and then just similarly from an operating leverage perspective, the slide shows revenue up 4% excluding Aerogold and may be you can in answering that question in terms of operating leverage, may be you can give a little bit of color on the expense growth we’ve seen in the segment and if this is kind of run rate expense growth or if it’s some kind of project related or something unusual in the quarter?

David Williamson

Certainly Rob, an important question I think so. Let me spend a moment on it. So this quarter expenses were higher than what we’ve seen reported in prior quarters and as you said, expenses are driven by strategic investments, so let me just give you a sense of what some of those are.

So, one that’s in the project space, as Gerry mentioned we’ve been investing increased investment in projects and one that he mentioned is an important one, multi-product sales origination. We have been working on that for a couple of years and now we are particularly active, because as of Monday of this week we just rolled it out to the last of our 1,138 branches. So it’s now out in all the branches.

That offering is a brand new client facing front end that has the objective of generating more sales and better advice for clients and most importantly deeper relationships. It’s an intelligent system, so when you put in client data it recommends the products and services that based on the data will be most appropriate for the client and as the client selects products during the conversation they are put into a shopping cart and at the end of the discussion between the client and our advisor, they can check out and all the documents are printed.

It’s been a great success with our staff; it’s been a great success with the clients and from a return perspective the cross sell levels that we are achieving are substantively better in the business case. So that’s an example of a substantive investment.

We’ve also been investing in additional client facing staff. We’ve been investing in mobile and we’ve been launching an innovative new product such as this Tim Horton’s Double Double Credit Card.

The important part is the investments are having an impact, so they are helping us to accelerate our revenue growth with the re-launch of Aventura. As I mentioned earlier, we are now getting high single digit growth in travel cards. We are now going to focus on building the momentum in other segments for our cards portfolio, and importantly we are being recognized for our leadership and online and mobile banking.

This quarter alone we received awards from global finance for best consumer Internet bank, Forrester Research for Best in Mobile Banking and Apple. Apple, had us as the only Canadian finance institution in their Best in Canada Apps. So from a client perspective we are getting clear feedback. They appreciate our efforts to spend money to build an ability to assist them to bank when, where and how they want. For example as Gerry mentioned, eDeposit, now we’ve had over a million deposits since we’ve launched that service. So a lot of investment, but a lot of positive results from that investment.

So going forward, just to answer your second part of the question. Given all that, what for the future, as far as the 2014 operating leverage expects to be pretty close to even when you adjust for the Aeroplan transaction going forward, we expect the level of expense growth we’ve seen this quarter to continue for the next few quarters, as we’ll continue to make these kind of investments in technology and people to achieve our two objectives, which is to accelerate profitable revenue growth and enhance client experience.

Robert Sedran – CIBC

So the message is as some of these projects roll off, the money is going to get recycled into other initiatives in other words.

David Williamson

That’s correct, because what we have experienced so far over the last few years, is that the investments we’ve been making, we’ve been able to land them successfully and hats off to our technology and other groups within the bank working with us to land these projects. So they are working and getting them delivered and they are working as far as our client impact and impact on revenues. So I think it will be foolish to do anything other than steady on and continue the growth we are building.

Robert Sedran – CIBC

Great, thank you.

David Williamson

Thanks Rob.

Operator

Thank you. The following question is from Sumit Malhotra from Scotia Capital. Please go ahead.

Sumit Malhotra - Scotia Capital

Thanks. Good morning. I wanted to stay with expenses for a moment please. When I look at a couple of segments here, first off the corporate segment, not one we have to think about too much, but on the core basis that you show a much bigger loss this quarter and it seemed to have been driven by a much larger level of expenses in corporate.

So it’s probably for Kevin. If you could help me understand what’s happening there and then to tie in the expenses for Victor. I’m pretty surprised just given the environment and the trend you show in your business that operating leverage turned negative there as well. Not in a larger way, but well more a reflection of the revenue environment and why leverage would have been negative in that segment. If you could help me, I’d appreciate it.

Kevin Glass

So Sumit, it’s Kevin. So in terms – I mean a couple of things driving the quarter’s results. First of all revenues are down. You would have seen that our security gains are a lot lower this quarter than they have been in the past, so that I think that talks to the quality of our earnings overall, but just generally speaking that would have had a negative impact on revenue.

And then you’re right, our expenses were up this quarter. In the corporate segment there is an element of volatility and we certainly saw some of that this quarter, although some of the expense will stick. But we did have some higher employee benefits expenses. As a result of changing interest rates, we adjusted some of our liabilities and that impacted our expenses.

Tech expense is also a bit higher as were some of our compensation expenses and we did have some timing on occupancy, so all of that seems to kind of come through in the current quarter. So if you take those, the revenue impact as well as those cost items that I’ve outlined, that would have resulted in the lower earnings in the corporate segment this quarter.

Sumit Malhotra - Scotia Capital

Just so if I hear you correctly and I want to stay just on the expense line in corporate, so I think if you clean this up the way you guys show it, it’s something like a $50 million plus sequential increase and I know it was a good capital markets quarter, but I wouldn’t think comp related to that segment would be being booked here. Is that correct? When you talk about employee benefits or compensation expenses, why would that have a major impact in this segment as opposed to the ones that are actually booking the market sensitive revenue?

Kevin Glass

No, it’s got nothing to do with the market sensitive revenue. We have some long-term benefits, plus retirement benefits, which is based on long-term interest rates. We happen to put two in adjustment this quarter that went to corporate and other, so that was the benefits item that I was referencing. We also had some cheque expenses that stay in the center, so those are a bit higher and so it didn’t have any – the comp stuff had nothing to do with the inter sensitive items Sumit.

Sumit Malhotra - Scotia Capital

Alright, and then for Victor on his segment.

Victor Dodig

Sure Sumit. Much like David’s articulation on Retail and Business Banking, we are investing in the Wealth Management business. We are investing in Atlantic Trust in terms of carving out some of the continued technology that we are working toward this year. American Century has made some good investments in terms of the new products and I would see that all as investment rather than expense and I will see that we would continue to have focus on revenue growth across all those businesses through those investments.

Sumit Malhotra - Scotia Capital

Thanks, guys.

Operator

Thank you. The following question is from Peter Routledge from National Bank Financial. Please go ahead.

Peter Routledge - National Bank Financial

Yes hi. I’ll ask a question to Victor, but I’ll start of by congratulating Gerry on a good run. Certainly the bank is in more solid footing than what you inherited. Victor, a question for you, can you just address continuity of your leadership team, I’ll leave it open ended to, probably to answer as you see fit?

Victor Dodig

Peter, we have a deep pool of talent in CIBC. We have businesses that are run by very talented executives and as we go forward, the strength and stability in terms of financial performance and in terms of organizational strength and strategic consistency is going to be the order of the day as we go forward.

Peter Routledge - National Bank Financial

So, you don’t anticipate any issues with the issues with leadership continuity?

Victor Dodig

I anticipate stability and strength.

Peter Routledge - National Bank Financial

Okay. David you referenced your work at the airport and I was there, I noticed it as well, a lot of branding there. One thing I noticed and this CIBC isn’t alone, is focus on new Canadians and I certainly understand why you’d be focused on that area, but some of the ads either from CIBC or from some of your competitors were along the lines of no credit history, no problem and I understand sort of why. I mean you have a new Canadian, you don’t have credit history. But I wonder, is the industry moving down the credit curve? Is the marginal consumer borrower in Canada inferior in credit quality than he or she five years ago?

David Williamson

That’s an interesting question Peter with respect from a five year spread. So let me speak to a bit with what we’re trying to do to with the GTA and may be I’ll come back to that for a focus first on your question regarding new Canadians.

Now the intent isn’t to go down the credit curve. New Canadians coming in (a) they are new to the country. In a country such as Canada, the growth and the population is largely from those that are joining us in the country and a lot of the folks coming in are of a solid credit standard and they are coming in to work here or to invest here. So we are looking to more than just participate in that space.

So the offer of no credit history, that’s obviously a pretty finite balance, but rather than a credit card with a couple of hundred dollars secured balance, the intent is to just start someone off with a small unsecured balance, so they can start to build a credit history. If it doesn’t go well, the size of the loss is quite limited in addition to the normal filters as to how we move forward, but obviously the experience is that it’s a winning proposition. So that's why you’ll see us and others doing it.

So it’s a very small balance that allows a new Canadian to start to build a credit history. So not looking to grow by going down the credit curve by any stretch, but certainly looking to grow by capturing the growth in our population that’s coming in from new Canadians and obviously they now turn to the airport. That’s obviously a important funnel or a channel to meet and engage with new Canadian. So we are trying in that space and we found people quite receptive to starting to engage right when they first get to the country.

So the intent there and that’s why you’ll see a pretty, fairly prevalent kind of way as a welcome to the country. You will need a bank and we stand ready to be that bank and in so doing, we try to offer a multi product package that’s suited to the needs of a new Canadian.

Beyond that in the airport we see opportunities in foreign exchange, we see opportunities in frankly banking the tens of thousands of people that work at the airport and new businesses that operate at the airport, along with branding that as you mentioned is quite prevalent now at the airport. So, hopefully Peter that answers your question.

Peter Routledge - National Bank Financial

Yes, it does. I guess one way to gain the – get a small-secured line of credit is you get it, you take a balance out and you pay it off and get a larger line of credit and then maybe you are not quite as vigilant about paying back on time. Have you – do you have ways of detecting that behavior and getting in front of it?

David Williamson

I mean as you know, the champion challenge or the details rigor around our loss monitoring and measuring, pretty robust and as we now look to – because this is new for us, to say for a small unsecured line that’s to try that and ensure those losses stay contained and it continues to be a profitable effort. We will be tracking it and I reemphasize, we are looking to grow, but not by growing down the credit curve. May be at this point I’ll hand over to Laura. She is probably best suited to speak to it.

Laura Dottori-Attanasio

Yes, so I guess I just like to add that as it relates to new Canadians, that when we do extend credit to them in the mortgage space, we do it at a lower loan to value and we do monitor all of our portfolios, including that one in.

We actually see better performance from a credit perspective with our new Canadian portfolio and so we do monitor a line of credit usage and what not and we do have required thresholds and red flags if you will in place as it relates to when payments are not being made on time, etcetera , not just for new Canadian, but for our entire portfolio?

Peter Routledge - National Bank Financial

Thanks to that.

David Williamson

Thanks Peter.

Operator

Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi - BMO Capital Markets

Thank you. I have three questions. First with David, you talked about not competing on price on the asset side of the balance sheet. There’s lots of competition it looks like with the money being offered to transfer accounts or iPad mini’s and the like. What’s happening on the deposit side?

David Williamson

Hi, Sohrab. Yes, my comment although it is universal across our products was specifically on mortgages. So when you see mortgage-pricing drop, you won’t see us initiating that move. So, that’s what I meant by we are not trying to, nor are we achieving the growth that we are seeing over the last several quarters through price.

So you also spoke specifically to balance transfers and so forth, so that’s something that long – just like competition in the mortgage space and the card space and in getting new clients and growing your book, the balance transfer has been a multi year strategy. So we haven’t really upped our game in that more so than what we have done in the past.

Having said all that, it is a competitive market place and we do see pricing pressure and business banking. We see it in our asset segment, but we are trying to grow our focus on that.

Now you asked specifically about deposits. I jumped off on mortgages, because that’s where I made my comment about not competing on price. Deposits, again a competitive space. This quarter, frankly for a little while we are seeing a good growth in our deposit book this quarter, particularly so in the business banking side.

I would say there is not any particular news or developments on the pricing competition on that front this quarter relative to any quarter and again, we are trying to compete by things like MPSO, where we are offering a package of products including deposits. We are trying to compete by innovation with eDeposit and a good mobile banking offer, which we are being recognized for. So we are trying to compete using innovation relationships and other tools other than price.

Sohrab Movahedi - BMO Capital Markets

Richard, I think that opening remarks noted a good quarter in parts, in your segment in part because of U.S Real-estate Finance. Can you quantify how much of the contribution that was to the quarter and what you think the outlook for that is in the next six to 12 months?

Gerald McCaughey

Sohrab of kind of just in terms of the actual amount, I mean we wouldn’t give that level of detail, but its an important part of the business, just in terms of what we are doing. So it was part of the contribution, but not massively material in terms of moving the dial, but an important part of our operation moving forward. So let me hand over to Richard.

Richard Nesbitt

Yes, it’s a business that we had shut down from ’08 to 2010. We restarted it in 2011 and we have a very good team that we maintained through that whole period.

The business is really composed of two pieces. One is our CMBS activity and that’s actually the growing piece of our business today, where we assemble portfolios of performing commercial real estate and then every quarter sell those into the CMBS market place. That market is continuing to be active and growing over time here. So we’ll continue to see that part of our business growing. We would have done a little over $1 billion this year, that’s our plan anyways, and we’ll do more next year.

Then of course we have our balance sheet business as well, where we are looking for good first mortgages on high quality properties in good urbane settings. The spreads that you can earn on first mortgages and commercial real estate in the Untied States is superior to almost any other corporate lending we do in the wholesale bank and so we’ve actually grown that business over the last three years.

Sohrab Movahedi - BMO Capital Markets

Okay, thank you. And then lastly for Laura, I mean credit generally stays good. Any commentary on the outlook as it relates to CIBC in particular?

Laura Dottori-Attanasio

Well Sohrab, as you know we don’t give forward-looking guidance, but I guess as you know loan losses really depend on I guess on a few things, so how well the economic environment is, the credit quality of our loan portfolio and our overall risk management effectiveness across the organization. I mean we continue to benefit from I think some risk management precipices in the front offices and in our second lines of defense and we’ve got strong credit quality in our portfolios and you know the economy seems to be stable, so I think I would leave it at that.

Sohrab Movahedi - BMO Capital Markets

Okay. Thank you.

Operator

Thank you. The following question is from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman - Cormark Securities

Hi, good morning. There’s been a lot of talk across the group about interchange fees and I’m wondering what your perspective is on the issue? Do you think something is coming down the pipeline? But more specifically, do you think that altering reward levels is a lever that you’d consider to offset any potential declines in interchange fees.

David Williamson

Hi Meny, its David Williamson. I’ll take that. So yes, the interchange was noted in the federal budge and again, there has been some discussions on prior bank conference calls. So just similar to those comments, discussions have been happening and continue to happen amongst interested parties. But all that does and it conforms its premature to speculate on outcome, whether its with respect to loyalty programs or what will or won’t happen to interchange rates.

I guess I’d just say from a personal perspective, I think the goal should be an outcome that supports the Canadian economy that supports building a leading hedge payment capability and services for Canadians. So I hope that what, if anything occurs, are aligned with those types of objectives.

Meny Grauman - Cormark Securities

Maybe I’ll just try it a different way in there, so is the issue of altering rewards levels on the table in your view.

David Williamson

I think it would be. I think Canadians love their loyalty programs for good reasons. We like them as well, because it does result in a more sustained relationship, but that’s you know the cost of the cards programs. So its that whole relationship around cards based on fee income, interchange income, interest income and the cost associated with those programs. So that’s why I say Meny, obviously we’ll just be speculating upon potential outcomes, because we don’t know what the inputs are at this point, but that would be part of any process or decision after the facts are known.

Meny Grauman - Cormark Securities

All right. I appreciate it. Thank you.

David Williamson

Thanks Meny.

Operator

Thank you. The following question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Darko Mihelic - RBC Capital Markets

Hi, thank you. Good morning. You’ve done an incredibly good job outlining many of your initiatives that you’re spending on, for which I am grateful actually and I’m going to have a lot of follow up questions for you after the call. The only thing that I would like to ask is you don’t touch upon commercial lending. Are those initiatives something that you intend to look at maybe later next year or is there something in the background that you just haven’t touched on?

Gerry McCaughey

Hi Darko, yes it’s actually something in the background I haven’t touched on and I talked about increasing you client facing staff. We are hiring relationship managers and client facing staff in our commercial lending group, so we are investing there and on the innovation front, the success of eDeposit for personal clients who have now moved into business banking. So we are offering to clients the ability to not have to go to the bank and just run their cheques through a machine that we give them and they can then avoid sending someone down to the bank each day, just to have real time value for their deposits while sitting in their office.

And we’ve got another innovation that we are in the process of launching for cash balances too, that will allow our business customers to avoid a trip to the bank. So I appreciate you raising it, because we are investing in innovation and front line staff and commercial lending as well.

Darko Mihelic - RBC Capital Markets

And if I may, is pricing something – I mean your remarks on pricing with respect to the retail, is it similar in commercial or my impression in the commercial is getting quite competitive and the growth prospects look good. Is the pricing dynamics slightly different in the commercial side?

Gerry McCaughey

Yes, I’d say your right on actually Darko. They are slightly different, more pricing pressure on the commercial side I would say that’s showing in our spreads. So it is a competitive space. Similar to personal we are trying to compete with things like innovation and other offers rather than through price, but there is competition and a spread pressure in the commercial lending side.

But as you also said, volumes are good. So deposits for us this quarter up 12%, lending up 5%, even with the decision to pullback on commercial mortgages. So we are seeing good volume, which I think bodes well for future revenue, but between a little bit of pricing pressure and the continued impact of the attractors with the low interest rate environment on a book and business banking that’s deposit heavy, the two of those factors are compressing margins.

Darko Mihelic - RBC Capital Markets

Great. Thanks very much.

Gerry McCaughey

Thanks Darko.

Operator

Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca - TD Securities

Good morning. David, two quick follow up questions for you. You did a good job of explaining the growth in cards and you can see in your page nine of your statistical supplement that the growth quarter-over-quarter was about 2.4% in cards and I appreciate all the things you said that caused that growth. But was there anything specific to transfers from TD that would have augmented that growth in the quarter.

David Williamson

Anything specific with respect to TD? No, not really. So we have a mechanism that’s been talked about before for payments of balances that are going to and from TD, but that depends on card utilization and it needs more time before that will even be able to be calculated.

Mario Mendonca - TD Securities

Right. So that 2.4% then, that sequential growth 2.4% is pretty much just, its all natural growth then.

David Williamson

That’s exactly right, yes.

Mario Mendonca - TD Securities

And again you’d attributed to Aventura and the travel rewards generally.

David Williamson

Yes, the travel rewards after a period where it hasn’t been strong now is strong. And then on the non-travel part, that’s coming up next kind of thing. Tim Hortons is strong out of the gate. So that looks like its going to be a winner and we’ve got other things in the pipeline on the non-travel cards too.

Mario Mendonca - TD Securities

Yes, I just wanted to make sure that there wasn’t anything special with the TD arrangement that would have caused that growth to look better than it really was, but it doesn’t should like it.

David Williamson

No, its not.

Mario Mendonca - TD Securities

So let me just drive into another topic. You gave a pretty good summary of the expenses and the initiatives in domestic retail and you helped us think through 2014 with one quarter left in terms of operating leverage. Can you think about 2015 with this higher expense level? Do you expect that bank to deliver positive operative leverage in 2015 in domestic retail or is it just too early to say?

David Williamson

It’s still early. But there is, the investment as I mentioned, the expense level we are seeing now I think will continue. We have been seeing both of that in the personal banking revenue growth. Business banking revenue growth has lagged that right, but the volumes haven’t, they’ve been better, but the spreads due to interest rates and pricing competition is affecting the business banking revenue growth.

So if you look forward, expense growth 5%, personal banking growth 5% speaks to a flat kind of operating leverage. Business banking revenues, we’ll see how they play out next year. If they start to tie closer to volumes, then that bodes well for operating leverage, but there’s no doubt that we are signaling here we are investing for our growth and that will put some pressure on operating leverage for the coming few quarters.

Mario Mendonca - TD Securities

So if you delivered flat, like zero operating leverages in 2015, you’d consider that a reasonably good result given all the investment spending.

David Williamson

Yes.

Mario Mendonca - TD Securities

Thank you.

Operator

Thank you. The following question is from Derek DeVries from UBS. Please go ahead.

Derek DeVries – UBS

Great thanks. Just a couple of small follow up questions. Starting with costs I guess. You guys added 1,250 people or so in the quarter. So there was a big jump-up in employees and I guess some of that’s gradate intake, but it seems like more than just that. So can you just maybe tell us where those people are going to work or if there’s anything special in that? Is there any initiatives or is it just kind of across the board?

Kevin Glass

Hey Derek, its Kevin. I think David spent a lot of time talking about investments. So there’s a fair amount. We also are spending money on some of our regulatory groups. I think there’s a slight increase over there and then our graduate programs obviously would also be an increase. So I think those will be the major areas where you’d see some growth.

Derek DeVries – UBS

Okay. So there is nothing transitory in there. That’s really people that will be there in the next quarter and the quarter after.

And then just on the wholesale business, there is a big bump up in deposits there. Was there anything sort of notable in there? Was it a change in pricing scheme or one big inflow or why did that jump up so much?

Richard Nesbitt

So, its Richard. Going out and getting deposits from our corporate clients is just as important as going out and making loans to them and so we do have a program in all the regions that we lend to try to sell fund as much as can. I’d say that probably what you are seeing is some of the work that Gerry and his team have been doing, gaining some more momentum and we are becoming more effective with some of our corporate clients, but yes, its very encouraging to see the bump-up to about $13 billion.

Derek DeVries – UBS

Okay. So I mean is that the result of new initiatives and whatnot, not only will this quarter be sticky, but you can see growth in future quarters as well or is there anything sort of exceptional.

Richard Nesbitt

Yes, we are going to continue to try to grow that number in all the regions we operate, particularly here in Canada of course. As we have grown our corporate, our position in the corporate credit market, we also want to see corresponding growth in our corporate deposit market and so you will see the two things march forward together.

Derek DeVries – UBS

Great. Those were the questions from me. Appreciate it.

Operator

Thank you. This is all the time we had for questions. I would now like to turn the meeting over to Mr. Gerry McCaughey. Please go ahead Mr. McCaughey.

Gerry McCaughey

Thank you. Before we end the call, I’d like to take this opportunity to thank the entire CIBC team for the commitment that each of you have demonstrated to the organization and to our clients and shareholders for the support you have shown.

We have accomplished much over the last few years and Victor’s appointment as CEO is a testament to the Board’s recognition and confidence in our strategy. I know that with Victor’s leadership and the support of the CIBC team, the bank’s future is in good hands. Thank you.

Geoff Weiss

Thank you, Gerry. That concludes our call. If anyone has any follow-up questions please contact our Investor Relations department. Thanks again for joining us this morning and we’ll see you next quarter.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank you for your participation.

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