Canadian Imperial's (CM) CEO Victor Dodig on Q4 2016 Results - Earnings Call Transcript

| About: Canadian Imperial (CM)

Canadian Imperial Bank of Commerce (NYSE:CM)

Q4 2016 Earnings Conference Call

December 1, 2016, 08:00 AM ET

Executives

John Ferren - SVP

Victor Dodig - President and CEO

Kevin Glass - Chief Financial Officer

Laura Dottori-Attanasio - Chief Risk Officer

Harry Culham - SEVP and Group Head, CIBC Capital Markets

Steve Geist - SEVP and Group Head, Wealth Management

David Williamson - SEVP and Group Head, Retail and Business Banking

Analysts

Meny Grauman - Cormark Securities

John Aiken - Barclays

Ebrahim Poonawala - Bank of America Merrill Lynch

Mario Mendonca - TD Securities

Steve Theriault - Dundee Capital Markets

Sohrab Movahedi - BMO Capital Markets

Peter Routledge - National Bank

Sumit Malhotra - Scotia Capital

Gabriel Dechaine - Canaccord Genuity

Doug Young - Desjardins Capital

Darko Mihelic - RBC Capital Markets

Operator

All participants, please standby, you conference is now ready to begin. Good morning, ladies and gentlemen. And welcome to the CIBC’s Fourth Quarter Results Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to John Ferren, Senior Vice President, Corporate CFO and Investor Relations, CIBC. Please go ahead, Mr. Ferren.

John Ferren

Good morning and thank you everyone for joining us today. This morning, CIBC senior executives will review our fourth quarter and fiscal 2016 results that were released earlier this morning. The documents referenced on this call, including CIBC’s news release, investor presentation, financial supplement and our annual report of 2016 can all be found on our website at 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 Victor Dodig, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with a financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with a risk management update. With us for the question-and-answer period our CIBC’s business leaders including Harry Culham; Steve Geist 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 this morning’s press release.

With that, let me now turn the meeting over to Victor.

Victor Dodig

Thank you, John. Good morning, everyone, and thanks for joining us. This morning CIBC reported record results for both the fourth quarter and fiscal 2016, wrapping up a year of tremendous progress for our bank. In the face of weak commodity prices, low economic growth, political uncertainty and regulatory change, we achieved our financial targets, we operated within our risk appetite, and we maintained a consistent focus on our integrated priorities of growing our client relationships, driving relevant banking innovation and simplifying the way we do business. We are transforming CIBC into a strong innovative and relationship-oriented bank, a bank that is very well-positioned to meet the evolving needs of our clients and to deliver future growth for our shareholders.

For the fourth quarter, adjusted earnings per share of $2.60 were up 10% year-over-year and our return on equity is 18.8%. While investing in our businesses, we also continued to build capital strength. We grew our industry-leading CET1 ratio to 11.3% at year end and to 11.5% on a pro forma basis with the announcement today of the sale and lease back of some of our Canadian retail properties. And for the eight time in nine quarters we announced a $0.03 increase to our common share dividend to $1.24 per quarter.

For fiscal 2016, overall, we reported net -- record net income of $4.3 billion and adjusted net income of $4.1 billion. Adjusted earnings per share of $10.22 were up 8% from 2015, which is near the top end of our target range.

Our earnings growth in 2016 was achieved through a combination of delivering strong revenue growth of 5%, while holding our expense growth to just 2%. This positive operating leverage reduced our adjusted mix ratio by 160 basis points to 58% as we made progress towards our goal of reaching 55% for 2019.

In support of our [next] [ph] objective and initiative to simplify and transform CIBC, we took a restructuring charge in the fourth quarter of $98 million after-tax. Kevin Lewis, not, Kevin Lewis, Kevin Glass our CFO will review our strong financial results for the fourth quarter and 2016 in a moment, sorry about that Kevin.

But first let me comment on some of CIBC’s significant achievements over the past year. It’s been an exciting year for our bank as we continue with our transformation. Over the past year we improved our client experience rating, and we remain focused on our medium-term goal of becoming number one on this very important metric.

In 2016 JD Power customer satisfaction survey, CIBC gained 22 points year-over-year reducing the gap to number one to only 11 points. We also continued to show improvement in our Ipsos CSI net promoter score we have outpaced our peers over the past four years.

As part of our client focus strategy, we are investing in our U.S. platform. Our planned acquisition of the PrivateBank is an important step forward in building a truly North American business. The midmarket commercial banking, wealth management and deposit taking capability of the PrivateBank will build on our existing U.S. capital markets presence and our 2014 acquisition of Atlantic Trust.

We and our partners at the PrivateBank remain fully committed to the transaction and expect to close the deal by the end of calendar quarter Q1 as scheduled. This acquisition offers significant upside to the shareholders of both companies, as well as to our respective personal, business, corporate, commercial and private banking clients in Canada and United States.

For the PrivateBank shareholders, it provide the certainty of an immediate 30% cash premium over the pre-offer price, plus the opportunity to participate in the future growth of the combined company.

For CIBC it creates a strong platform to deliver U.S. banking services to our Canadian clients and to provide commercial and private banking services to the clients at Atlantic Trust. We are aware of the recommendations from Glass Lewis, Egan-Jones and ISS, and reiterate our position that the transaction offers significant long-term value for both companies that far outweighs recent short-term and potentially short-lived swing in U.S. banking sector valuation.

On the innovation front, we extended our leadership by introducing new products and services, with security and convenience for our clients always at the forefront of our thinking. Financial innovation is occurring at a rapid pace, driven by tech savvy consumers and FinTech disruptors, some of whom we’ve partnered with to stay on the leading edge of consumer facing innovations.

To keep ahead of the changing market, CIBC also entered into a unique alliance with National Australia Bank and Israel’s Bank Leumi, our arrangement will allow three banks on three different continents to collaborate and share information -- innovation strategies and insights that can improve the banking experience for our clients.

We also continue to lead the market in mobile payments. After the successful launch of Apple Pay earlier this year, we are now the first bank in Canada to allow our clients to use Samsung Pay and through our CIBC Live Labs team we continue to collaborate with the MaRS Discovery District to bring the next wave of banking innovation to our clients.

We are proud to be recognized for our collaboration with FinTech sector for the Digital Finance Institute, which is a Vancouver-based innovation advocacy group who named CIBC Financial Institution Innovator of the year at the recent 2016 Canadian FinTech Awards.

Our third strategic pillar is simplification. In 2015, we introduced program Clarity with an enterprise focus on making it easier for our employees to meet the needs of our clients. Our target run rate cost savings for 2016 under this program was approximately $100 million. We exceeded that target and we invested the majority of our savings in strategic growth and innovation initiatives for our clients.

So now I am going to touch on a few highlights from our businesses, each of which perform very well over the past year. Let me start with Retail and Business Banking, we communicated at our Investor Day a year ago, our goals of being number one in client experience and profitable revenue growth. In 2016, we made progress in each of these areas.

We completed the first year with our banking centers operating under single leadership model, leaders who are visible in the community and focused on our clients. In addition, we continue to transform our physical banking centers, introducing new technology to make everyday banking easier and allow us to spend more time providing advice to our clients.

During the year, we also introduced several innovative products and services for the convenience of our clients. I’ve already mentioned Apple and Samsung Pay, we introduced the CIBC Smart Account, we introduced the CIBC Smart Prepaid Travel Visa Card and we introduced the capability for our clients to open an account or apply for a mortgage entirely through mobile device.

In October, we announced our partnership with fintech innovator Borrowell to leverage the unique technology and process for one click online lending of up to $35,000 for our clients. Our partnership with Borrowell is yet another example of the CIBC team leveraging innovation to deliver the best client experience in the market to drive growth for our bank.

On revenue growth, we moved from lagging to leading with strong and balanced growth across lending, deposits, cards, mortgages, business banking, and other product areas. We led the industry in market share growth for mortgages, business deposits, business lending and we are number two in personal deposits.

In mortgages we have made significant progress in growing with our clients. Our portfolio is now predominantly composed of CIBC mortgages sourced from our own sales force. As a result, we have much deeper relationships with our mortgage clients today than we did four years ago and one third of our business was broker based.

On the risk front, our adjudication process and policies remain strong, and are adapted regularly for changing market conditions. During 2016 we adjusted lending criteria not just in mortgages but in other areas of loan book, including credit cards and energy in response to elevating risks in certain areas.

As Laura will review in our update shortly, our mortgage portfolio and total loan book have performed very well over the past year and my colleague David Williamson is here this morning to answer any questions you may have about Retail and Business Banking, as well as innovation.

Our Wealth Management business continues to enhance the client experience, drive asset growth and optimize its platform. In 2016, we aligned our Canadian Private Wealth Management and CIBC Wood Gundy businesses under one leadership structure to elevate our high net worth client experience and better need -- meet their needs. Our latest JD Power results showed improving customer satisfaction among our retail brokerage clients. We have moved from fourth to third in full service and from fourth to second in self directed brokerage.

In our Asset Management business, we grow assets under management by 8% driven by market appreciation in net sales we were particularly stronger in the fourth quarter and we launched new products and programs to meet the needs of -- changing needs of our investors. My colleague Steve Geist is here this morning to answer questions you might have on Wealth Management.

And in Capital Markets we continue to focus on supporting our clients by delivering integrated advisory, lending, training and research solutions. We have strengthened our coverage and execution capabilities in both Canada and the United States with new talent to advise our clients in areas of technology, innovation and private capital.

In the fourth quarter we leveraged our leading edge foreign exchange platform and partnered to introduce the CIBC Air Canada Conversion Visa Prepaid Card a first of its kind in Canada. This innovative product allows travelers to purchase and store up to 10 currencies on a single card that can use at retailers around the globe.

We have also enhanced the no-fee CIBC Global Money Transfer service introduced in 2015, by including this feature in CIBC's mobile banking app by adding the U.S. -- and by adding the U.S. CIBC clients can now send money to 45 countries in the world from the convenience of their smartphone, we are the only Canadian bank to allow for that capability. My colleague Harry Culham is here this morning to answer questions on our Capital Markets business.

So, in summary, I am very pleased with our results and the progress team has made in 2016. I am going to turn it over to our CFO now, Kevin Glass, for his financial review. Kevin?

Kevin Glass

Thanks, Victor. My presentation will rephrase the slides that are posted on our website starting with slide five. Let me start with the brief overview of 2016 the year in which we delivered very good results and achieved our financial targets.

For the full year, reported net income was $4.3 billion and reported EPS was $10.70. Items of note during the year contributed a positive $0.48 per share with the more significant items being the gain on sale of our minority investment in ACI and the gain on sale of a processing center offset somewhat by restructuring charges primarily relating to employee severance, increases to our collective allowance and increase in legal provisions and higher loan losses in our exited European leveraged finance portfolio.

After adjusting for the items of note, our net income was a record $4.1 billion, our EPS of $10.22 up 8% from 2015 and well above our goal of at least 5% growth. We delivered a strong return on equity of 19% and we finished the year with Basel III CET1 ratio of 11.3%, while continuing to invest in our business and growing our dividends by 10%. These strong results reflect the success of our client focused strategy and diversified business model.

Moving on to our results for the fourth quarter, CIBC reported net income of $931 million and earnings per share of $2.32. Items of note this quarter reduced EPS by $0.28 per share and included a restructuring charge of $0.25 per share primarily relating to employee severance.

The balance of my presentation will be focus on our adjusted results for the quarter, which excludes these items of note. We have included slides with reported results in the appendix to this presentation.

Adjusted net income for the quarter was just over $1 billion and adjusted EPS of $2.60 reflecting solid earnings growth in all of our businesses and for the eight time in the past nine quarters we announced to increase our quarterly dividend which we moved higher by $0.03 to $1.24 per share.

Slide seven shows the positive impact of our mix ratio from our strong operating leverage and savings related to the restructuring charges. The charge of $134 million pretax announced today is a result of our ongoing program to simplify our bank and better align our resources to meet the changing needs of our clients. Together with the charges we took in 2015 we have recorded restructuring charges of $430 million pretax over the past two years. These are broad based across most of our businesses and we’ve taken and supported the enterprise-wide transformation and simplification of our bank.

In 2016 we have realized run rate savings from restructuring of approximately $200 million, which contributed about 130 basis points to the year-over-year improvement in our mix ratio. We have positive operating and leverage this year even without the benefit of restructuring driven by strong revenue growth.

The majority of the savings are being reinvested in the business in order to drive growth by enhancing customer experience, as well as focus on driving operational efficiencies. Our productivity ratio improved to 58% in 2016 from 59.6% in 2015 and we are making good progress towards achieving our run rate goal of 55% by the end of 2019. Looking forward, we expect to generate cumulative savings from charges we have taken to date of approximately $500 million by 2019, including savings of another $150 million in 2017.

Let me now review the performance of our business segments, I will start with the results for Retail and Business Banking on slide eight. We recorded another quarter of quality earnings with good topline growth. Revenue for the quarter was $2.3 billion, up 5% from last year driven by growth in both Personal and Business Banking.

Personal Banking revenue of $1.8 billion is up 5% from the same period last year, performance benefited from strong volume growth across all products. Total asset growth of 9% led by residential mortgage growth of 11%, our personal lending portfolio including cards grew 4% as we continue to see improving results in this area. Personal deposits and GIC growth of 8% benefited from the success of our recently launched Smart Account, as well as growth from other savings and GIC promotions.

Business Banking revenue was $443 million, up 7% from last year driven by strong lending and deposit volume growth and higher credit related fees partly offset by narrower spreads. Business lending balances were up 13% and business deposits and GIC were up 10% from the same period last year.

The other segment had revenue of $22 million, which was up $3 million from the same period last year due to the gain on the real estate disposition partly offset by the continued run-off of our FirstLine mortgage broker business.

Provision for credit losses was $206 million, up $43 million or 27% from the same period last year due to higher losses in business lending, personal lending and cards portfolios as a result of credit migration and to lesser extent portfolio growth in unsecured lending. Losses were up $9 million from the prior quarter partly due to higher losses in our business lending portfolio.

Non-interest expenses were $1.1 billion up 5% from the prior year. We continue to invest in strategic growth initiatives to support our transformation into a modern, convenient and innovative bank, our remaining committed to improving productivity. Our expense level this quarter was somewhat higher than recent quarters as a result of the timing of our spent on certain strategic growth initiatives.

Good topline growth contributed to positive operating leverage of 70 basis points and a mix ratio of 51%, an improvement of over 30 basis points from the prior year. Net interest margin was down 3 basis points sequentially, reflecting the continued impact of our low interest environment and our business mix. Retail and Business Banking net income was $688 million up 2% from the same period last year.

Slide nine reflects the results of our Wealth Management segment. Revenue for the quarter was $620 million, up $10 million or 2% from the prior year, driven by strong performances across all businesses, partially offset by the sale of ACI.

The other line in our Wealth Management segment includes the results of ACI for the periods prior to our announcement of the sale. Excluding ACI revenue for the quarter was up $34 million or 6% from the prior year. Retail brokerage revenue of $332 million was up $15 million or 5%, growth in assets was partially offset by lower commission revenue due to the decline in client transition volumes in our full service brokerage business.

Asset Management revenue of $190 was up $12 million or 7% mainly due to higher average AUM, reflecting market appreciation and positive net sales. Net sales of long-term mutual funds were particularly strong this quarter compared to the prior year.

Private Wealth Management revenue of $98 million was up $7 million or 8% due to higher average assets and strong volume growth in loans and deposits. Non-interest expenses of $441 million were well-controlled and comparable with the fourth quarter of last year. Net income in Wealth Management were flat from last year, excluding ACI, net income was up $22 million or 21%, the strong operating leverage of 6.3%.

Turning to Capital Markets on slide 10, we continue to deliver strong client driven results. Revenue this quarter was $676 million, up $106 million or 19% from the same quarter last year. Global markets revenue of $365 million was up $94 million from the prior year driven by higher revenue from interest rate, commodity and equity derivatives trading.

Corporate and Investment Banking revenue of $313 million was up $11 million from the prior year driven by higher equity underwriting and higher corporate lending revenue, partially offset by lower debt underwriting and advisory revenue and lower investment portfolio gains.

Provision for credit losses for the quarter was nil compared to $22 million in the prior year and $7 million in Q3. Non-interest expenses of $327 million were up $5 million from the prior year primarily due to higher spending on strategic initiatives. Net income of $283 million was up $100 million or 55% from the prior year.

Slide 11 reflects the results of Corporate and Other segment. Net loss for the quarter was $57 million compared to the net loss of $32 million in the prior year partly due to the net income of our -- net impact of our Treasury activity.

Turning to slide 12, we further strengthen our capital position over the past quarter, providing us a flexibility to continue to invest in our business, maintain a strong dividend payout and deal with an evolving regulatory environment as we look beyond the expected closing of our acquisition of PrivateBancorp.

Our CET1 ratio was 11.3% at October 31, up 40 basis points from the prior quarter. Solid organic capital generation and impact of issuing Treasury shares to participants in our shareholder investment plan were partly offset by the impact of the restructuring charge we took this quarter. Our CET1 ratio of 11.5% pro forma of the sale and lease back of the Canadian retail properties announced today.

With that, I’d like to turn the meeting over to Laura Dottori.

Laura Dottori-Attanasio

Thanks, Kevin, and good morning, everyone. I am going to start on slide 14 with our loan loss performance. Compared with adjusted results from last quarter, loan losses were $222 or 27 basis points, that’s up $19 million mainly due to higher losses in Business Banking as Kevin pointed out earlier.

On a reported basis, loan losses were also $222 million with no items of note and this is down $21 million from the prior quarter. Looking at the full year, our loan loss ratio on an adjusted basis was 29 basis points compared with 27 basis points in 2015.

Turning to slide 15, new formations were 394 million that’s down 180 million from last quarter. Gross impaired loans were $1.7 billion or 52 basis points as a percentage of gross loans and acceptances. This is down $80 million or 3 basis points quarter-over-quarter.

Now on slide 16 and 17, we are providing you with additional information on our Canadian retail portfolio. Slide 16 is an overview of our residential mortgage and HELOC portfolio in Canada, the Greater Vancouver area and the Greater Toronto area, annual fee that our late stage delinquency rates across the portfolio continue to remain low and stable with the Vancouver and Toronto areas performing significantly better than our Canadian average.

Slide 17 shows current Beacon and loan-to-value distribution in our Canadian uninsured residential mortgage portfolio. In Canada, 8% of our uninsured mortgages have a current Beacon score of 650 or less and 11% have loan-to-value over 75%. What is of note is that less than 1% of our uninsured mortgage portfolio falls into both of these categories.

Now looking at the two key markets the Vancouver and Toronto, you'll see they have better credit profile than the Canadian average. Beacon score distributions are towards the higher end and loan-to-value are towards the lower end, with average loan-to-values at 46% in the GVA and 53% in the GTA, and that’s compared to our national average of 56%.

Now this year we originated $48 billion of uninsured mortgages, approximately 35% were to clients in the GTA and 21% to client in the GVA. With respect to new originations in these two markets, average Beacon scores of new clients were better than existing clients and average loan-to-values of new originations were 57% in the GVA and 62% in the GTA, which again are lower than our national average of 64%. So as you can see we continue to be very pleased with the credit profile and quality of our uninsured mortgage portfolio.

On slide 18 we have our Canadian Credit Cards and Unsecured Personal Lending portfolios, and on a quarter-over-quarter and year-over-year basis the late stage delinquency rates in our Canadian cards portfolio is up and this is driven by a combination of higher unemployment in the oil provinces and credit migration in the rest of the portfolio. The late stage delinquency rate for unsecured personal lending remains relatively stable with some movement in the oil provinces.

Slide 19 shows the distribution of revenue in our trading portfolios as compared with VaR and with one negative trading day this quarter compared with none last quarter. Our average trading VaR was $5.2 million this quarter and that’s down from $7 million -- $5.7 million last quarter.

To conclude, I'd say notwithstanding the energy headwinds that we face this year we are very pleased with our risk performance. Our loan growth remains aligned with our risk appetite, our portfolios performed as expect with our 2016 loan loss ratio coming in at 29 basis points on an adjusted basis and we continue to have sound risk management and solid credit adjudication standards process fee, so all-in-all a very good year.

I'll now turn things back to John.

John Ferren

Thank you very much, Laura. So that concludes our prepared remarks, we will now move onto the question-and-answer period. I would just remind everyone if you could please limit yourself to one question and then re-queue if you have others so that everyone has an opportunity to participate. So, Operator, can we please have the first question on the phone.

Question-and-Answer Session

Operator

Certainly. Thank you. [Operator Instructions] The first question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is open.

Meny Grauman

Hi. Good morning. And I had a question on the efficiency ratio, if I look at the performance that you are able to deliver in terms of reducing that efficiency ratio this year and extrapolate, it looks like you will be able to hit your 2019 target early and so I am wondering what your perspective at this? Are you just being conservative here or is there reason to believe that the pace that -- of improvement that we saw this year needs to slow down as we move into 2017 and 2018?

Kevin Glass

Hi, Meny. It’s Kevin. I will take that. I think what you should bear in mind is that 2016 was a particularly strong year and we saw significantly movement in 2016. I think we would stick to our original target of getting to the 54% run rate towards the end of 2019. As we make more changes it, obviously, becomes more and more challenging, because it just you are at the margin. So we are very happy with our progress. We will continue to work in that direction. But we think 55% by the end of 2019 is the appropriate target to shoot for.

Meny Grauman

Thank you.

Operator

Thank you. The next question is from John Aiken from Barclays. Please go ahead.

John Aiken

Good morning. I wanted to revisit the mortgage loan growth that you are able to generate in the quarter. Was any of this driven by, I guess, the impact from the changes the federal government has put in place in terms of the housing market place or if it hasn’t, what impact does that have on your outlook going forward for 2017?

David Williamson

Hi. Good morning, John. The growth we have achieved this year and recently I think is more a function of the changes that we telegraphed some time ago and that’s really been the building of our proprietary sales force, we made three changes a while ago and decide to come out of the FirstLine broker channel, which Victor referred to in his remarks were -- wasn’t our friend or wasn’t our client base and we couldn’t drive deep relationship.

So he said we would exit that business. He said we hopefully transition 25% of those clients over to CIBC and we build up our own proprietary sales force. So that’s gone particularly well. We actually transitioned above 50% of FirstLine into CIBC and our proprietary sales force has – it’s our people, our brand, our clients and we have been very effective in driving deep relationships. So that’s really been the big driver of the improvement in growth.

Now looking forward, I would anticipate the growth to ebb for couple of reasons, one of which you mentioned the regulatory changes I think will result in price changes and ebbing in growth rates. And secondly that proprietary sales force I referred to very effective, it’s doing all the things we hope it would do, but now is about the desired levels. So we are going to maintain the level, beside that sales force you are not going to see the year-over-year bump from a bigger sales force in the market.

John Aiken

And so, David, are you comfortable with the aspect that you expect to continue to take market share even if the overall growth rate of the industry slows? And I guess, overall, for your entire book are you comfortable with ceding some of the margins with this business mix on a go forward basis in order to achieve that growth?

David Williamson

So not comfortable ceding margin, so we are fourth in the marketplace and we are a price taker. So we will not and are not competing on price. But I am comfortable with relatively stronger growth rates and let me explain why.

As Victor said, strategically we have said we want to lead in profitable revenue growth and client experience. So by definition we need to be on the higher side of relative growth. Why I am comfortable with that is when we look at the comment that Laura made as far as the quality of the business whether it’s delinquency rates, Beacon score or loan-to-value we look good. But in the regions of greater focus Toronto and Vancouver we look particularly good.

And then if you look at the loan-to-value for uninsured mortgages originated in BC over the last 12 months of the four banks that reported so far ours is the lowest. And if you look at the loan-to-value of uninsured mortgages originated across all of Canada in last 12 months you will again see us comparing very well. So I am quite comfortable with, in fact, very pleased with the quality of the growth of the business we are putting on our books, so I will be happy to continue with that business.

And then from a strategic perspective, we said, we’d like deep relationships, and mortgages are all about deep relationships it’s an anchor product, deep relationships and more sustainable relationships if you have that mortgage. So we are going to continue to look to have mortgage growth, and as Victor said, and our revenue growth is very broad in nature.

You look out it from a market share perspective we are number one or number two and market share growth across pretty much very product, so not just mortgages, and if we look at revenue in absolute dollar growth year-over-year mortgage is less than 20% of that roughly $500 million of growth.

In fact, about 20% for everything, cards 18%, revenue from deposits 16%. So revenue is very broad in nature, which speaks to getting those deep both sides of balance sheet relationships. So I am very happy with that growth. I will be thrilled if we can maintain it and both the strength of the growth and the quality of that growth is something I think we are all pleased with.

John Aiken

Great. Thanks David, I’ll re-queue you and I am with you.

David Williamson

Thanks, John.

Operator

Thank you. Your next question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala

Good morning. I was wondering if you can just provide some color in terms of you had pretty good build up on the capital ratio on the CET1. If you can talk about, one, just in terms of how you are thinking about deployment of capital both organic and inorganic forms, and also in terms of if you can remind us about the next steps as we get closer to closing the PrivateBank deal, what approvals are needed from the regulators and shareholders? Thank you.

Victor Dodig

Ebrahim welcome to the call, I think, this is your first call.

Ebrahim Poonawala

It is. Thank you.

Victor Dodig

Let me just say that our capital deployment priorities remain unchanged and are consistent with what we have communicated to our investors over the last couple of years. The first point is to maintain strong capital ratios. In the face of macroeconomic uncertainty, regulatory fluidity and business flexibility our strategic priority is to maintain strong capital ratios and at close of this quarter it’s 11.3% that’s industry-leading.

We also on a pro forma basis sold 89 of our retail properties, which boosted our capital 11.5%, something candidly that we have had in the works for a long, long time as the leadership team focuses on -- focusing on banking and making sure that we can deploy our capital and growing our banking in a new modern age of banking.

The second thing I'll say is that it's important to have capital to invest and that is both for organic and inorganic investment, the short-term objective is to have that capital for the PrivateBank acquisition, which we plan to close at the end of the first quarter. And importantly, for the organic investments that we plan to make over the next couple of years in banking as we transform CIBC.

And the third piece of it is effectively our dividend payout ratio. We have committed to our investors to be at the higher end, the last eight out of nine quarters we have increased our dividend that should be seen as a sign of confidence in our business. We did that again this quarter and we are at 46.4% in terms of our target payout range. So that’s really our capital story Ebrahim. It hasn’t changed. It’s very consistent and it will be going forward.

Ebrahim Poonawala

And I guess this is a follow up in terms of how -- what is the next step in terms of private, in terms of shareholder approval from their shareholder and regulatory approval?

Victor Dodig

We have December 8 vote scheduled with the PrivateBank shareholders. We have regulatory approvals that are in slide and we have integration teams working on integrating our businesses, so all is moving along.

Ebrahim Poonawala

Got it. Thanks for taking my question. I will get back in queue.

Victor Dodig

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Good morning. Just real quickly first, are there any implications for the bank from an earnings perspective related to the sale and lease back?

Kevin Glass

Mario, it’s Kevin Glass. We will have some lease costs. It won’t be that material and certainly less than $20 odd million a year, so that will be the drag and this drag coming out of the transaction.

Mario Mendonca

Okay. Because that was real quick let me just, sorry about that. Victor, you sounded, like it was interesting listening to you describe the PVTB deal and the shareholder vote. Could you handicap this for us like what is your concern here, because that was unusual to hear a CEO discuss that?

Victor Dodig

Okay. I was answering your question. So someone asked me the question, I just answered the question, you bring him ask me two questions, just like you are asking two questions and I try to answer them as best as I can and transparently as I can.

Mario Mendonca

[Ph I am talking about your] opening comments, Victor?

Victor Dodig

My opening comments, oh, nothing, just, yeah, I was basically telegraphing the fact that we are in the midst of closing a transaction and highlight for our investors why we think it’s a good thing for our shareholders.

Mario Mendonca

Are you concern that you are going to get a notebook?

Victor Dodig

No. I am actually concern -- I actually very confident in the investments that we are making, I am confident that our shareholders vote, yes, PrivateBank will be a much stronger bank being part of the CIBC family. There are banks that doesn’t have a credit rating today, with CIBC they will be having better depth and strength in terms of deposit taking capability, they will have better strength in depth in terms of their ability to grow and we will be able to importantly, Mario, be able to offer our Canadian clients banking platform in the U.S. marketplace.

We know that there are two yes recommendations from both Glass Lewis and Egan-Jones, ISS has said no and I think shareholders of the PrivateBank and the PrivateBank management team very feel very good about the transaction that we put forward.

Mario Mendonca

Good luck. Thank you.

Victor Dodig

Thank you.

Operator

Thank you. The next question is from Steve Theriault from Dundee Capital Markets. Please go ahead.

Steve Theriault

Thanks very much. Good morning, everyone. So question on capital, pardon me, probably for Kevin, at the time of the PrivateBancorp announcement, the guidance was for CET1 above 10%, you had some good accretion another 15 basis points from the sale and leaseback, one or maybe two more quarters of internal capital generation, maybe some tailwind from higher rates in Q1 on your pension obligation. So by my math maybe you are closer to 11% or at least 10.5% at the time of close versus 10%, is that reasonable, can you maybe be more specific where you think will be capitalize post-PrivateBancorp?

Kevin Glass

See I think we have lot of moving pieces when you look at – when you look at capital, in this particular quarter as you will see in the graph that we put up there was very little movement on RWAs, all that had to do with we have some credit upgrades, the other issue is just time to decay worked in our favor this quarter. So, I think, our guidance just treating to be above 10% is still way to go, I mean, we are confident of doing that.

We still continue to grow the bank strongly, so you know, obviously, that absorbs capital. So I think we will stick with our guidance and if you got some extra capital we will take it because having strong capital ratios is certainly a focus of ours.

Steve Theriault

And if the yield curve holds where we are today, should we see capital bump in Q1 from the pensions?

Kevin Glass

I think it will certainly help, but I would say is, we measure that in basis points. So it’ll help. But it’s not going to take us from 10 to 11, for example, [inaudible] help us.

Steve Theriault

Okay. I will leave it there and re-queue. Thanks.

Kevin Glass

Thanks.

Operator

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

Sohrab Movahedi

Okay. Thanks. Kevin, do you think to get to the 55% mix ratio by 2019, you’ll have to take more restructuring charges?

Kevin Glass

Sohrab, I think, that in terms of running our bank we going to have to continue looking at, continue to simplify, continue to get more effective. But what I would say is, in terms of significant charges that we’ve highlighted as items of note, we wouldn’t plan on doing that. I think that this particular charge is in line with what we signaled a year ago to make the changes if we are making really would require restructuring charges. But moving forward while we will continue to simplify the bank we don’t anticipate any significant items of note.

Sohrab Movahedi

In other words, you will do it with that called it resources on hand without having to get it adjusted?

Kevin Glass

That’s correct. It will ongoing process.

Sohrab Movahedi

Okay. And Laura, if David wants to continue to grow at these rates, I mean, number one lead in variety of market share growth rates, are you comfortable that for that to continue you don’t have to adjust your risk appetite?

Laura Dottori-Attanasio

That’s right.

Sohrab Movahedi

Thank you.

Operator

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

Peter Routledge

Hi. Thanks. Just to compliment you guys on your disclosure on 2016 and 2017, I hope your peers saw your fine examples. Question on page 16, the thing that really strikes me is just very fast growth in your mortgage balances in Greater Vancouver and GTA, looks like about 23% by my calculation, that just seems very fast and I am wondering if you are also worried about the pace of that growth? And the follow-up question would be, are your non-real estate secured exposures that default so drawn and undrawn growing as quickly in those areas?

Victor Dodig

Well, I can start Peter and Laura can jump in as she like. As far as, what we are doing is in that growth, it is strong growth in the GVA area. We have a really quite strong team that we’ve built there. I just highlight a couple of factors. One is the loan-to-value of the mortgages that we are originating in the GVA is shows a tremendous amount of buffer.

So we are not reaching in that market, and although, we’re achieving that growth. Again, I’ll highlight our loan-to-value the business of our booking is more conservative than when you compare against our peer. So we are not getting it through price, we are not getting it through reaching more as far as the balance which we’ll end on, which I think take us back again to the folks we have in that region.

The other thing I would point out is that we look at the nature of the business through our booking is very balanced, we are not just seeing jumbo mortgages with no other relationships. We are seeing whether it’s coming through our mobile channel or whether it’s just the business specifically in Vancouver, our deep relationships that are coming with deposits, so the foreign investor and the new immigrants not just taking a mortgage they are showing up with funds, if they want of our booking.

So the kind of client, the kind of relationships we are looking to achieve and we are achieving it not reaching on price and not reaching on how much we’ll provide as far as loan against the value of the home.

Laura Dottori-Attanasio

And, Peter, I guess, what I’d add to that. So we continue to be very comfortable, BC has well diversified economy, so we still see better than average unemployment than the Canadian average there. As I said, our risk profiles and our loans performance continues to offer superior performance and to the question you had, we do see delinquency rates are better and that’s not just and I think this is part of your question, that’s not just due to the growth that you are seeing in the book, but when we look back at the various vintages overtime, it’s a consistence story of better overall performance.

Peter Routledge

Okay. Just the question I asked was not about delinquencies, in fact, are your non-real estate secured exposures that default from -- in Vancouver and trying to grow as quickly, so…

Laura Dottori-Attanasio

No.

Peter Routledge

Yeah.

Laura Dottori-Attanasio

Yeah. And no, they are not.

Peter Routledge

No. Okay. Thank very much.

Operator

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

Sumit Malhotra

Thanks. Good morning. Just a clarification on capital and then my actual question, please. First off, on the lease, sale and lease back that you have announced the 89 branches for a solid gain. You have transactions and awards for the rest of the 1000 branch network you have in Canada? And the other part of that capital question, which is for Kevin, is 120 basis points a good estimate for the PVBT impact, right now?

Kevin Glass

Sumit, in terms of additional transactions, I mean, we don’t have the whole bunch lined up which we are going to click on a quarter-by-quarter basis. But as we’ve stressed, we look at capital every day, it’s very important and we look to optimize our capital on an ongoing basis. This has proved to be a particularly attractive transaction for us. And then with respect to the PVBT impact, I mean, that’s, I think, you are in the ballpark.

Sumit Malhotra

All right. And then, my actual question is related to your synthetic equity total return swap business and I know this when we talked about a lot in 2015 after the government announcement and I think it's coming up in the spring. When I look at your tax equivalent benefits line, I kind of thought of that as being a way we can measure the trend in this business as far as running off that operation. It was down decently this quarter, about $50 million, although, there does seem to be some seasonality for CIBC in that line. Is that the best way to measure, how you’re progressing in running off that business, and more specifically, relative to the impact or the estimated impact you gave us last year, where we do we stand now?

Harry Culham

Hi, Sumit. It’s Harry Culham speaking. So you are seeing a seasonality factor I think in those numbers you mentioned there, the serious impact will be felt in the latter half of 2017 and going into 2018 and I am optimist we will be able to continue to build our business as we have over last little while to mitigate the effects of TRS over time. So you’ll see that in the latter half of 2017 and into 2018.

Sumit Malhotra

So, Kevin, I’ll leave it here, that TEB line, I think, this quarter is about $97 million for CIBC. Is the bulk of that really need the TRS and should that trend zero in the second half, as Harry mentioned?

Kevin Glass

I think, large part of it is relates to the TRS but certainly not all of it, as Harry said, that would fluctuate, so we can do five or 10 agreements that would have an impact as well. So that would run-off over time, but certainly not all of our TEB is impacted by the new legislation, but that is a good proxy line to see how to run-off.

Sumit Malhotra

All right. Thank you for your time.

Operator

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

Gabriel Dechaine

Good morning. My first big question is about the recent rise in rates, is that, how is that effecting your funding strategy in the near-term and is it impacting your trading business in positive way? And then my real question is on mortgages, the growth has been very high, everybody noted that and then I appreciate the disclosure, it's helpful, very helpful. But I am just wondering and David alluded to the ebbing of the growth in future quarters. How much do you expect your mortgage growth to pull back and then how much of an impact has the growth we’ve seen over the past year had on your earnings growth? I have my own number. I am just wondering as this mortgage growth decelerate, is it a big or insignificant headwind to your earnings per share growth?

Victor Dodig

That certainly was a multifaceted question so I mean…

Gabriel Dechaine

You got to join the club here.

Victor Dodig

I’ll take just first part of rate funding and then maybe Harry can talk about trading. When I say our funding cost impacted more by credit spread and an absolute level of interest rates, we’ve got a very diversified funding base. So it will flow and it will have an impact over time and existing rising rates would help us overall from a bank perspective. But we effectively moved those costs through to the business and they are effectively absorbing it. So from a funding perspective, I think, we will from a borrowing point of view we will place to absorb the increases. Harry?

Harry Culham

Yeah. Hi there. And from the trading perspective, I wouldn’t say the absolute level of rates has impacted the business significantly, what I would say is that, we are seeing high quality well diversified earnings often in challenging markets as you recall after November 8th and we are really striving to prudent growth across various asset classes by industry and by geography, and that’s what we are seeing in quarter four once again.

Gabriel Dechaine

So the clients activity picked up?

Harry Culham

Yeah. Client activity is quite strong and I would say the outlook looking pretty good as well as we start into November.

Gabriel Dechaine

Okay.

David Williamson

And picking up on Part B of the – your question Gabriel. So, on the mortgage growth, so the regulatory changes kind of an industry-wide impact that could cause growth ebb. And then more CIBC centric is that our proprietary sales forces have been growing quite robustly over last while, that’s now going to level off. So that’s where we have a greater impact in our growth relative to the industry.

Having said that, I still anticipate that we’ll show strong on a relative basis that to our peers, the quality of our growth is strong and the depth of relationships where we are getting is good, so two green lights on the dashboard and as long that’s the case we’ll continue on.

As far as the relevance or impact of mortgages to our overall revenue growth, I mean, it's in a margin product, obviously. So, therefore, it comes off, it has, that lesser relative impact. But I think, probably, the best way to look at it, I mean, look at the $495 million of incremental revenue that we booked this year, less than 20% of it came from mortgages even though mortgages are growing so much stronger than the overall market and cards was in there, deposits was in there, business banking in there, everything roughly at about 20%. So if one of the cylinders of the engine slowdown a bit, what seems evident is the engine running stronger across the base and other cylinders should continue strongly. So mortgages, big headline numbers as far as growth, as far as the impact on our bottomline, it's very much balanced as with strength in other businesses.

Gabriel Dechaine

So you’d expect about high single-digit growth next year or something like that?

David Williamson

I have to see how the industry performs. I would say that, our job really is to perform well on a relative basis irrespective of the macro markets. So I can’t control for the macro market, you’d probably, as well as not better place to have a view on that, but whatever it is, we hope to be on the right side of it.

Gabriel Dechaine

Thank you for the thorough answer. Thanks.

David Williamson

Thanks, Gabriel.

Operator

Thank you. The next question is from Doug Young from Desjardins Capital. Please go ahead.

Doug Young

Yeah. Thank you. I’ll keep it to one question. So, you said strong capital ratio a number of times and you said that in the past, you got a number of changes that are potentially coming from Basel and some changes from OSVI. You got an acquisition that closes before March, that pro forma takes you to roughly 10.3%. So I am just wondering and your thought process, can you talk and may be quantify what is strong capital from a CET1 ratio perspective, is it 10.5%, is it 11%, given again all the changes that are coming down the pipe on the regulatory side? Thank you.

Victor Dodig

Doug, Victor here. Really quickly, we’ve always said strong capital, the whole global industry is elevated in terms of CET1 where we -- relative to where we were in the post -- immediate post financial crisis world. Our view is that over the medium-term we are in the 10.5% range, that’s a good range to be in and that provides us sufficient flexibility. It may flow it up above 10.5% every once in a while and may flow below, but that’s the kind of may be the pivot point that we should be thinking about.

Doug Young

And how does this factor in, sorry, I’ll come with the B part of my question, but how does this factor and you reduced your ROE out, look I don’t think it a big shock. I mean, how did -- what was the biggest driver behind reducing that medium-term outlook on the ROE side, was it the regulatory capital changes or is there other items that factored in?

Victor Dodig

It's always a combination of a number of things, including, regulatory change that we envisioned, including growth in the U.S. where we recognized that ROE is lower than it is in Canada, but it's still is a sufficient ROE to create shareholder value above our cost to capital.

Doug Young

Okay. Thank you.

Operator

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

Darko Mihelic

Hi. Thank you. Good morning. And maybe I’ll just stick to one question, but it’s obscure one. Ever since one of your competitors had a bit of a problem with capital, I am looking at the floors that are in place. If I were looking your disclosures and where would I find if indeed there is an addition to your RWA from the Basel I floor?

Victor Dodig

Darko, I think the disclosure that would indicate where the Basel I floor is, but I mean, what I would say, that something that we watch very careful. We have enough room as far as the floor is concern and right now it’s not a major concern for us, but to the extent that they impact and we take into account. For part second I will hand it over to Laura to give a bit more detail.

Laura Dottori-Attanasio

Well, I am not sure of much help, so I believe we do not actually have a line item that shows us. So I think that’s a takeaway for us to see if something that we would look at in our future disclosures.

Darko Mihelic

Okay. Thank you very much.

Operator

Thank you. That was all the time we have for the question this morning. I would now like to turn the meeting back to Victor.

Victor Dodig

Thank you, Operator. CIBC began fiscal 2017 with strong momentum, which we look to sustain through a challenging business environment. We expect interest rates and GDP growth remain low and disruption from traditional and non-traditional competitors to remain high. Additional regulatory changes as we said during the call could also put pressure on bank capital levels globally.

So what is that mean to our earnings growth and returns, what is that mean for our shareholders. In terms of earnings, we will continue to target EPS growth of at least 5% annually. I think it will be harder to achieve in 2017 given the environmental headwinds and the integration of our acquisition of the PrivateBank that we will try to work toward that 5%. We are resetting our ROE target as Doug Young noted to the 15% plus range through the cycle and I think reflects regulatory and market pressures on a bank capital levels globally, as well as an increasing mix of U.S. growth in our strategy.

Strategically as we look out over the longer term, we are very confident with the business growth plans we have in place. We will continue to focus on our clients. We are going to continue to simplify our business and we are going to continue to introduce relevant innovation to modernize our banking platform. By integrating and executing on these priorities, I am confident CIBC will become the North American bank of choice for our clients and I am confident we will be able to generate long-term value for our shareholders.

In closing and on behalf of CIBC’s executive committee and our board, I would like to thanks CIBC 43,000 team members for their ongoing dedication to serving our 11 million clients. And I would also like to thank our shareholders for their continued support and trust in our plans to build the bank of the future. I’d like to thanks the analyst community for their two question approach. So thank you everyone. Have a safe, relaxing and enjoyable holiday.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!