CIBC's (CM) CEO Victor Dodig on Q1 2017 Results - Earnings Call Transcript

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Canadian Imperial Bank of Commerce (NYSE:CM)

Q1 2017 Earnings Conference Call

February 23, 2017, 08:00 AM ET

Executives

John Ferren - Senior Vice-President, Corporate CFO and Investor Relations

Victor Dodig - President and Chief Executive Officer

Kevin Glass - Chief Financial Officer

Laura Dottori-Attanasio - Chief Risk Officer

Harry Culham - Senior Executive Vice-President and Group Head, CIBC Capital Markets

Steve Geist - Senior Executive Vice-President and Group Head, Wealth Management

David Williamson - Senior Vice-President and Group Head, Retail and Business Banking

Analysts

Meny Grauman - Cormark Securities

Ebrahim Poonawala - Bank of America Merrill Lynch

John Aiken - Barclays

Steve Theriault - Eight Capital

Gabriel Dechaine - Canaccord Genuity

Sumit Malhotra - Scotia Capital

Sohrab Movahedi - BMO Capital Markets

Doug Young - Desjardins Capital

Nick Stogdill - Credit Suisse

Mario Mendonca - TD Securities

Operator

Good morning, ladies and gentlemen. Welcome to the CIBC Quarterly Financial Results Conference Call. Please be advised 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, John.

John Ferren

Thank you very much, good morning and thank you everyone for joining us. This morning, CIBC’s senior executives will review CIBC’s first quarter results for 2017 that were released earlier this morning. The documents referenced on this call, including CIBC’s news release, investor presentation and financial supplement, can all be found on our website at cibc.com. An archive of this audio webcast will also 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 provide a risk management update.

With us for the question-and-answer period are 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 today'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 very strong first quarter results with adjusted earnings of $1.2 billion and earnings per share of $2.89 up 13% from a year ago. Each of our business units managed through challenges in our operating environment to deliver robust growth and continued progress against CIBC’s strategy, which is one, to deepen client relationships, two, to embrace innovation to improve the banking experience for our clients and three, to simplify our bank.

We are pleased with the broad based strength and quality of our earnings in the first quarter and the consistency of the quarterly results we continue to deliver for CIBC’s shareholders. Revenue growth for the quarter was 9% driven by exceptional results in capital markets and strong top-line performance in both Wealth Management and Retail and Business Banking.

Our results are also a reflection of the benefits of the investments we have made across our business in support of our client focus strategy. Strong revenue growth combined with continued focus on expenses, improved our mix ratio to just over 56% this quarter. Credit performance was also strong and on the capital front, we managed to grow our Basel III CET 1 ratio to 11.9% from 11.3% last quarter while delivering an adjusted ROE of over 20%.

By consistently growing our earnings over the past couple of years through both a very low interest rate and low growth environment, we are very confident that our client focus strategy is working. Reflecting these strong fundamentals, we announce a $0.03 dividend increase today taking our quarterly dividend to common equity shareholders to $1.27 per share. This is the 9th time in the past 10 quarters we have raised our common dividend and it moves us further towards a target payout ratio of 50%.

So now I would like to talk about our business unit performance, and let me start off with Retail and Business Banking, which reported year-over-year adjusted earnings growth of 3% to $709 million. Solid top-line growth of 5% from both Personal and Business Banking combined with controlled expense for growth 3% resulted in positive operating leverage of 2% for the quarter.

Our net interest margin saw some erosion this quarter but that was due partly to product mix and also the deposit promotions that contributed to 4% sequential growth and a 9% increase in deposit balances on a year-over-year basis. Loan losses of $205 million were higher than a year ago, but comparable to the prior quarter.

During the first quarter, we launched Digital Cart an innovative mobile app that allows our clients to apply for mobile banking products easily and securely, using their mobile device or online. Our continued focus on leveraging technology to enhance the client experience was also once again recognized by Forester Research. For the third consecutive year CIBC earned the highest score for online banking functionality among the five major retail banks in Canada.

We are very proud of our accomplishment and our commitment to adopting technology to enhance our clients’ banking experience, we will remain at constant for the CIBC team. My colleague, David Williamson is here this morning to answer any questions you might have about Retail and Business Banking as well as on innovation.

Turning to Wealth Management. We delivered record adjusted earnings this quarter of $135 million supported by strong performance across all of our businesses. Earnings growth is driven by higher trading activity in fee income from Wood Gundy and year-over-year AUM growth of 10%. During the quarter, our Wealth Management team, continues to enhance the client experience, drive asset growth and simplify our business platform.

We begin collocating our private banking and CIBC Wood Gundy teams in select locations across Canada and that is meant to deliver a more targeted offer and a deeper relationship with our higher net worth clients. We also launched new multi currency brokerage accounts in response to demand from our clients to hold U.S. dollars and other major currencies in our registered accounts. My colleague Steve Geist is here this morning to answer questions on our Wealth Management Business.

Our Capital Markets Business, also reported a record quarter with adjusted earnings of $371 million, which is up 50% from a year ago. These earnings are supported by a combination of well diversified and client driven trading revenue business, cost discipline and strong credit quality. During the quarter, we expanded our CIBC Global Money Transfer service to China through a partnership with China Union Pay International. CIBC clients can now send money to 46 countries around the world with no upfront fees from the convenience of their phone or computer.

In our Commodities Business, we added precious metals and collector coin purchase capabilities, is a suite of products we conveniently offer our clients through mobile devices and online banking. Some of these initiatives between our Capital Market Business and Retail and Business Banking are simply our bank working better together to serve our clients on a broad basis. And my colleague and my colleague Harry Culham is here this morning to answer questions on the Capital Markets Business.

So to conclude, we are off to a very good start in 2017. Our record results this quarter are strong evidence that our strategy of building a strong, innovative and relationship oriented bank is working and it positions us well with support of market conditions to deliver EPS growth for 2017 in excess of our 5% minimum target.

So with that, I’m going to turn the call over to our CFO Kevin Glass. Kevin.

Kevin Glass

Thanks Victor. In my presentation, we will refer to the slides that are posted on our website, Starting with Slide 5. As Victor noted in his remarks, we had a very strong quarter to start the year, we reported net income of $1.4 billion and earnings per share of $3.50. Item of note during the quarter contributed a positive $0.61 per share to our results including a gain on the sale and lease back of certain retail properties. And the gain is reported in the other business line within Retail and Business Banking.

After adjusting for the items of note, our net income was $1.2 billion, EPS of $2.89 was up more than 13% from a year ago. Our return on equity was over 20% and our Basel III CET 1 ratio grew to 11.9%. We also announced another $0.03 increase to our 40 dividend which is now a $1.27 per share. The strength and consistency of our earnings growth over the past 2.5 years has supported a 27% increase in our dividends.

The balance from our presentation will be focused on adjusted results, which excludes the items of note. We have included slides of reported results in the appendix to this presentation. Let me now review the performance of our business segments and I will start with the results for Retail and Business Banking on Slide 6.

We reported another quarter of solid earnings in our Retail Business with good top-line growth and a modest increase in expenses. 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 was up 5% from the same period last year. Performance benefitted from strong volume growth across all products partially offset by narrower spread.

Total asset growth was 10% led by residential mortgage growth of 12%. Our personal lending portfolios including cards grew 4% as we continue to see improving results in this area. Personal deposits and GIT growth of 8% benefitted from a continued success of our Smart accounts and promotions during the quarter.

Business Banking revenue was $453 million, up 7% from last year driven by strong lending and deposit volume growth and higher credit related fees partially offset by narrower deposit spread. Business lending balances were up 11% and business deposits and GITs were up 10% from the same period last year. The other segment had revenue of $8 million and is down $8 million from the same period last year due to the continued run-off of the exited first line mortgage broker business.

Provision for credit losses was $205 million comparable with the prior quarter. Loan losses were up $42 million or 26% from a same period last year largely due to higher loss rates and to a lesser extent portfolio growth in cards and personal lending.

Non-interest expenses were $1.1 billion, up 3% from the prior year. We continue to invest in strategic growth initiatives to support our transformation into a modern, convenient and innovative bank are remaining committed to improving productivity. Good top-line growth contributed to positive operating leverage of 1.9% and a mixed ratio of 49.1% an improvement of 89 basis points from the prior year.

Net interest margin was down six basis points sequentially, reflecting lower deposit spreads due to promotions during the quarter for continued impact of the low interest environment and also business mix. Retail and Business Banking net income was $709 million up 3% from the same period last year.

Slide 7reflects the results of our Wealth Management segment. Revenue for the quarter was $653 million, up $51 million or 8% from the prior year, driven by strong and broad base business performances. Retail brokerage revenue of $352 million was up $44 million or 14% largely due to growth in assets under administration and higher transactional activity including debt and equity issuance in our full service brokerage business.

Asset Management revenue of $194 million was up $13 million or 7% this was largely due to higher average AUM, resulting from market appreciation and strong net sales of long-term mutual funds. In Q1, long-term mutual fund net sales of $1.2 billion up from $371 million a year ago.

Private Wealth Management revenue of $107 million was up $9 million or 9% mainly due to higher annual performance fees by Atlantic Trust and growth in Canadian based loans and deposits. Non-interest expenses of $466 million were up $30 million or 7% primarily due to higher performance based compensation. Net income in Wealth Management was $135 million up $13 million or 11% from the same quarter last year.

Turning to Capital Markets on Slide 8, we delivered exceptionally strong client driven results this quarter. Revenue for the quarter was $877 million, up $191 million or 28% from the same quarter last year. Global markets revenue of $531 million was up $140 million driven by higher revenue from equity derivatives, interest rates and commodities trading.

Corporate and Investment Banking revenue of $335 million was up $49 million from the prior year driven by higher equity and debt underwriting and higher corporate lending revenue, partially offset by lower advisory revenue. Provision for credit losses was $2 million in the quarter down from $25 million for the prior year when we had elevated losses in the oil and gas sector. Non-interest expenses of $382 million or up $40 million from the prior year primarily due to performance driven compensation. Net income of $371 million was up $122 million from the prior year.

Slide 9 reflects the results of our Corporate and Other segment, where we had net loss for the quarter of $49 million compared with the net loss of $27 million in the prior year, this was largely due to lower revenue in CIBC, FirstCaribbean and the net impact of our Treasury activities.

Turning to Slide 10, we further strengthened our capital position over the past quarter. Our CET1 ratio was 11.9% as of January 31, up 60 basis points from the prior quarter driven by a solid organic capital generation and impact of issuance through our dividend reinvestment and employee share based plans. Again on the sale on leaseback of certain retail properties this quarter contributed 15 basis points.

Today, we announced our intention to seek TSX approval for a normal course issuer bid, who will permit us to purchase for cancellation up to a maximum of $8 million or approximately 2% of our outstanding common shares over the next 12 months. Our very strong capital position provides us flexibility to invest for future growth and to pay a strong dividend while maintaining a prudent [backup] (Ph) of future regulatory changes.

And with that, I’ll turn the call over to Laura.

Laura Dottori-Attanasio

Thanks, Kevin, and good morning, everyone. Slide 12 begins with our loan loss performance. Loan losses were $212 million down $10 million mainly due to lower losses in Business Banking and the lower collective provision for non-impaired loans. This was partially offset by higher losses in credit cards as we saw write-offs increase from the last quarter. Our loan loss ratio was 26 basis points compared with 27 basis points in the prior quarter.

Turning to Slide 13, new formations were $399 million relatively unchanged from the last quarter. Growth impaired loans were $1.4 billion or 44 basis points as a percentage of growth loans and acceptances. This is down $240 million or eight basis points from the fourth quarter mainly due to a reduction in our European portfolio.

Slide 14, which we introduced last quarter provides an overview of our Canadian residential mortgage and HELOC portfolios in Canada, the greater Vancouver area and the Greater Toronto area and here you will see that our late stage delinquency rates across these portfolios continue to remain low and stable with the Vancouver and Toronto areas performing significantly better than our Canadian average.

Slide 15 is a new slide and it shows Beacon and at origination loan-to-value distribution for the $12 billion of unsecured mortgages that we originated in the first quarter. Of that amount, approximately 42% were to clients in the GTA and 15% to clients in the GVA. Average Beacon scores of new clients continue to be in line with our existing client and average loan-to-values of new originations also continue to be lower than the national average of 64% with 56% in the GVA and 62% in the GTA.

Slide 16 shows our Beacon and loan-to-value distribution for our overall Canadian uninsured residential mortgage portfolio. In Canada, 8% of our uninsured mortgages have a current Beacon score of 650 or less and 12% have loan-to-values over 75%. Less than 1% of our uninsured mortgage portfolio falls into both of these categories.

The Vancouver and Toronto markets continue to have better credit profiles than the Canadian average. Beacon score distributions are towards the higher end and average loan-to-values were 48% in the GVA and 52% in the GTA. Both lower than the national average of 56% and with distribution towards the lower end.

Slide17 shows our Canadian credit card and unsecured personnel lending portfolios. On a quarter-over-quarter and year-over-year basis, the increase in the late stage delinquency rate in our Canadian cards portfolio is driven by a combination of higher unemployment in the oil provinces and some credit migrations in the rest of the portfolio. The late stage delinquency rate for our unsecured personnel lending portfolio remains stable with a marginal improvement on a quarter-over-quarter basis but slightly up year-over-year in the oil provinces.

Slide 18 shows the distribution of revenue in our trading portfolio as compared with VaR. We had all positive trading days this quarter compared with one negative trading day last quarter. Our average trading VaR was $6.1 million up from $5.2 million mainly driven by increased client flows in currencies and in rates.

And now I’ll turn the things back to John.

John Ferren

Thank you, Laura. So that concludes our prepared remarks, we will now move to questions.

Question-and-Answer Session

Operator

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

Meny Grauman

Hi, good morning. Just I wanted to ask a question about the PrivateBancorp doing, just in terms of details, wondering significant dates from here specifically the June 29 date. Is it correct that that’s a date after which you can walk away from this deal or I guess PrivateBancorp can walk away from the deal without any sort of penalties?

Victor Dodig

Good morning, Meny. I suspected that question might come up. So let me just say a couple of things, one is our U.S. strategy continues to remain intact and that is to grow our footprint in the U.S. to be able to better serve our clients as well as to have exposure into a market that we see growth in over the long-term.

We therefore continue our integration work, we continue with our regulatory approvals and the June 29 data you mention is the expiry date where everyone can walk away and in the interim we will wait for the PrivateBank Board of Directors to announce the next meeting day.

I will say couple of things one is that the PrivateBank is a good standalone bank. The PrivateBank is a better bank under CIBC’s ownership, because we will be providing the resources necessary to allow them to grow with their growth plans that I think will deliver the value necessary to our own shareholders over the long-term.

But I will also say that that we are going to always act in the best interest of our shareholders, we will be disciplined, we will be patient, we have plenty of organic growth to deliver from our existing footprint as well. So that discipline and patient is something I want to emphasize to all of our shareholders.

Meny Grauman

And just help us understand the delay in rescheduling of votes, I understand it’s still the [Indiscernible] of the PrivateBancorp board, but how do we understand this delay and what is that predicated on or what is happening behind the scenes that is causing that delay and are we waiting for something, or are you waiting for something specific to happen, before that date gets announce?

Victor Dodig

No, I think the PrivateBancorp board is acting in the interest of their shareholders and we are acting in the interest of ours.

Meny Grauman

Okay. And then if I could just add just a follow-up, I think you kind of mentioned it, but I just want to clarify just in terms of strategy. If for whatever reason you were to walk away from this deal, how does that change your strategy and specifically your capital priorities, does that ratchet up a big return of capital to shareholders in that event?

Victor Dodig

So we are focused on long-term Meny, we have lots of different avenues to provide return to our shareholders in the short to medium term, but in the long-term, we believe that we need to have that U.S. exposure. So when it comes to capital, our capital levels at 11.9% today are strong, but that’s always been consistent with our strategy and our strategy has always been be a strong bank have a strong capital position to do three things, one is to continue to invest in our business and you see the results that we are delivering in our footprint that we have today.

The results are strong, this is strong in the top-line, and this is strong because we are investing in our businesses. We are investing in our businesses to build a stronger client franchise across CIBC. So organic investment is a priority. The second thing is to continue to grow our dividends. We have a shareholder base that’s income and growth oriented, we want to make sure that we continue to grow those dividends and do so with a good consistent business strategy.

We are now continuing to approach the 50% payout ratio, but we are pleased with the fact that we are able to grow our dividends for our clients. And we have always said that the third avenue for capital deployment is inorganic and or buybacks. So inorganic is clearly in the warehouse of getting the private transaction, the PrivateBank transaction. But today we also announce at NCIB because we want to make sure that we have every avenue open to us for our shareholders and we may have to in fact simply be more active in terms of buying back stock overtime if we are not able to consummate that deal in this period of time. So we want to make sure those avenues are open to us.

Meny Grauman

Thank you very much.

Operator

Thank you. [Operator Instructions]. The following question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala

Good morning. I had a question on if you can just talk about in terms of residential mortgage growth. One, I guess if you can sort of comment on what has been the impact in how you approach this lending so far based on the government actions that have been enacted over the last six months? And how have you see competitor behavior change on that front across or of the region if you can comment on that first?

David Williamson

Certainly. So, our objective is to meet client needs and to do it in a way that’s good for our clients and for our shareholders and within whatever the context would be. So some of the government actions such as the tax change in the west coast has impacted volumes in that region, you know volumes in other parts of the country have adjusted well over the same period of time. There is some degree of change in the regional element of the markets, but irrespective of that markets continue to be strong and aggregate.

I guess our objective Ebrahim is to build the business in the sensible kind of way. So if your question really is within the context of the current market, how do we feel about our mortgage growth then let me address that specifically. We feel quite good about the nature and the size of the growth we are achieving for probably three reasons: One is, we are not using prices or lever to compete in the current market.

Our NIMS and the mortgage business quarter-to-quarter, year-over-year is stable. The NIM compression that Kevin referred to and Victor referred to are a result of promotions in the deposit space, promotions that affected in the short-term in this particular quarter and the current interest environment and business mix. So we are not competing on price.

Second we are not competing on risks. So if I look at some of the data that Laura has provided, but to cut it in a different way to look at on a comparative basis, the loan-to-value of our uninsured new originations in Q4 was 64%. Only one of the big five were lower than us and there is a 63. In Q1 of 2017 our loan-to-value of new originations are still at 64%.

If we look at British Columbia, which has been an area focus over last while our loan-to-value of uninsured new originations was lowest of all the banks at 60% and in this quarter we dropped further to 59%. And if we get more specific and look at the GVA at specifically the Vancouver area our loan-to-value of new origination is even lower at 56%. The point for reasoning all that is just to make the point we are not computing on risks.

We are competing on client experience. So in that area, whether it’s our banking centers or have introduced products that we are gaping from our portfolio which is the power plant and mortgage HELOC product we have introduced that, we expect our adjudication time, we have improved our processes and that’s allowed our banking centers to perform well in the current context.

And then in the mobile advisors, where we have grown that force it’s performed very well and its very consistent with our client experience aspirations of allowing our clients to bank when, where and how they would like. The mortgage advisors will come to you. That channel, 30% of their clients are new to the bank and from that new client base, we are building deeper relationships, something we couldn’t do in the broker channel. So we have exited the broker channel and actively building our mobile advisor channel.

So we focus on client experience, irrespective of the context from a regulatory perspective, we are not completing on price, we are not competing on risks, but we do compete on a better client experience then we will get the business we are getting which is a healthy growth in new clients and building deeper relationships of the mortgage business. I hopefully addressed your question, and it goes to extra step to look at our comfort compliments and the things we are building.

Ebrahim Poonawala

That’s helpful. So I get assume that when we look at the that you provided for originations. We shouldn’t expect that 64% more higher?

David Williamson

Yes, in fact in the last quarter it’s stable and then in the British Columbia has actually lowered a bit, so it will change a bit, but if you look overtime its actually pretty stable and more conservative of than our peer group.

Ebrahim Poonawala

Got it. And just to dive n to that, when you think about the outlook and I guess it sounds like you feel comfortable around growing that portfolio around the rate you did in 1Q around 10% to 20% on an annual basis, but from a credit quality perspective, both credit cards and real-estate lending. Based on where things stand today like how do you think about credit quality for 2017, understanding that a lot can change, but just do you expect any meaningful deterioration in any of the consumer portfolios as the CM progresses?

David Williamson

Well I will hand over to Laura in just a moment, but as far as the growth rate again it’s we operating within the context that exist. Right, so Vancouver is falling, Toronto is speeding. The actual greater growth we will have will depend on the context we are getting, key thing is we are just not competing our price to risk and we continue to just build our client base and develop strong relationships in that context. Maybe with respect to our view on credit environment, I can maybe handover to Laura.

Laura Dottori-Attanasio

Sure, I guess what I would add to that as you saw we did have really good key one performance and that was consistent across all of our credit portfolio. It really depends on the overall economic performance and unemployment trend, what we are seeing is that in the oil provinces unemployment seems to have peaked, it’s come down a bit in Canada. Now we have seen our delinquencies as you saw in our disclosure, increase in the oil provinces over the past year particularly in the cards space.

But that does feel like its stabilized and although delinquencies remain somewhat elevated in the card space in particular related to oil, we do think that our losses if you will on a go forward basis should only be slightly higher and that’s taking into account seasonality if you will of the portfolio. So if the economic performance sort of continues to remain and unemployment trends as well, then we should continue to have a good year for 2017.

Ebrahim Poonawala

Thanks for taking my question.

Operator

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

John Aiken

Good morning David. I wanted to follow-on in terms of the deposit pricing actions you took this quarter, was this to just shore up some of your funding or was this actually pre-funding for growth that you are expecting for the remainder of the year?

David Williamson

Hi John. No, it’s not really directly related to short-term needs and funding, it’s really just our continued objective to build the relationship with clients on both sides for the balance sheet to grow our lending business and to grow our deposit business. And within the context that is competitive on the deposit side.

So the growth in lending, we are picking up market share to the point I made earlier it’s not on price or business banking NIMS are flat quarter-over-quarter, year-over-year, mortgage and NIMS flat. And we are picking up market share on deposits and that is just because we want that kind of relationship with our clients.

So half of the NIM compression is both promotional raised, the trick then is to maintain the balance that come in during that promotional period. It is something that worked well last year and we hope works well again this year.

John Aiken

David I guess we wouldn’t necessarily expect to see the full recovery of the six basis points over the next couple of quarter then if that’s what the case is particularly if you are good, you continue to grow your mortgage book faster than we are at the other loan balances.

David Williamson

Let’s just break apart the six, so the six is half promotional, right. Its during this period of time when we are in the market trying to build those balances. The other half has really one basis point is mix and two is rates. So as the promotional part will become less a factor during the rest of the year. We are still in promo now and we are now in Q2 so it’s going to impact Q2 a bit. But that will not be a factor on the latter part of the year. But rates and that basis point of mix like it will be.

John Aiken

Great. Thanks David, I appreciate it.

David Williamson

No problem John. Thanks.

Operator

Thank you. The following question is from Steve Theriault from Eight Capital. Please go ahead.

Steve Theriault

Thanks very much, maybe just a quick one to start for David to follow-up. David last quarter, I might have been left with the impression that the positive impact from the mobile sales force had come and gone, now that the number of mobile advisors has peaked, is that what we should think about it or are there more productivity gains still to come as that sales force gets more seasoned overtime and if that’s the case how long should we expect to see a benefit from those hiring that have happened over the last couple of years?

David Williamson

Hi, good morning. A couple of comments and maybe I miscued folks and I said that will come to industry growth rate quicker. I mean we have backed off on the growth in that mortgage channel but just recently, right. So that means that on a year-over-year basis, we still have in our growth in the size of that channel quarter-over-quarter at last, but so we are going to have quarters year-over-year growth.

And then to your point, I hope for some extended period of time, we have productivity growth, because there is new members of the team, we are better supporting them and what we have learned over time is there is a pretty good growth and productivity of that, so that could carry for a while.

And obviously we are trying to help them do better on the deposit growth along with mortgages, so we are trying to give them better tools to onboard clients in the deposit side as easily if they can do the mortgages. So what Victor talked about was Digital Cart, ability to open up accounts even if you are not a client through your phone and so forth.

We will facilitate the kind of tools of that channel will have the growth on board deposit. So I guess two points, one is what I talk before as we flat line that channel that’s recent, so we are going to have a while of continued year-over-year growth and that the productivity gain side hopeful be sustainable growth beyond that.

Steve Theriault

Okay. That’s helpful. Thanks for that. For that and then for Harry on top of the markets, obviously a very solid start to the year I know we are relatively early on in 2017, but when I think your business for this year I think a lot of that the drag from a total return swaps in the back half of the year specifically. So maybe you can just give us an update on how much pressure we should expect in the back half of the year from TRS how your efforts are going in terms of replacing some of those revenues and given a strong Q1, a very strong Q1 do you feel like you are in a position to grow earnings this year, conditions I mean great, but remained, remain constructive the rest of the year?

Harry Culham

Okay. Good morning. Why don’t I make a quick comment on the quarter, obviously it was a strong quarter, pleased with the trading revenues as you pointed out actually across all product areas if you look at equities, commodities, fixed income and rates. So the environment obviously is - the conditions continue to be very good for our clients generally in our business and our team is providing our growing franchise, industry leading insight bias and execution, we are pleased with our progress on our plan.

At the end of the day we are focused on repeatability of consistent and sustainable growth of this business. You pointed out the environment Q1 was exceptional, very good market conditions, strong client activity and Q2 is off to a good start, the pipeline is strong. With respect to the TRS, I think I mentioned before, it’s starts to hit us and all banks towards the end of quarter two and the most the large impact is the last half of 2017, and the impact is in and around 5% of our net income after tax, after mitigation efforts. Now, having said that the markets conditions are very strong, client activity is great, work with the clients very closely to navigate interesting market. So market conditions do play a factor.

Steve Theriault

So when I think about 5% after mitigation that’s can still that just arithmetically to 10% in the back half of the year effectively relative to what your run rate would be otherwise?

Harry Culham

Yes, that’s probably a good approximation.

Steve Theriault

Okay. That’s helpful. Thanks for the time.

Harry Culham

You are welcome.

Operator

Thank you. The following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine

Good morning. Question for Victor back onto this capital management stuff on the NCIB specifically. So just to from understanding your comments correctly or interpreting, you got the NCIB place and they are if PrivateBancorp doesn’t happen so you are there you got a capital deployment outlet and it’s also there in case it does happen, we think about the flow back issue if you are going to be ensuring a lot of shares to PrivateBancorp shareholders so I suppose they could be used in either case.

Victor Dodig

Yes, it has a dual purpose function. How you like the new shop Gabriel? Everything going well?

Gabriel Dechaine

So far so good.

Victor Dodig

Glad to hear that.

Gabriel Dechaine

I get to speak French a lot more which is nice.

Victor Dodig

Fantastic.

Gabriel Dechaine

Then what do you mean on integration efforts, I just wanted to clarify that like you don’t own the business yet so it’s not like you are cost cutting or anything like that. Is it just planning or what do you mean by integration efforts?

Victor Dodig

It’s a good question, it’s about planning, it’s about planning for the future and how to build a formidable business bank across borders to serve our clients. A big part of this is serving our won Canadian clients who are doing increasing business south of the border. We are able to bank them today from a lending perspective but a more robust offer is I think is what they would be looking for over the long-term for CIBC.

Gabriel Dechaine

Okay. And my last question then it’s also on this issue the situation. You said that you are working in the best interest of CIBC shareholders that’s great to hear. And then are you kind of leaving the door open that the PrivateBancorp may happen, may not happen but long-term you believe being in the U.S. is an important part of your CIBC’s future. So let’s just say that this deal doesn’t happen, how quickly are you looking to deploy capital into the U.S., there is a big valuation ramp up we have seen over the past year and past few months. is this situation where you are going to get hard at work in looking at the next deal or would you be a lot more patient given the valuation landscape?

Victor Dodig

I just want to reiterate a couple of things. One is we are building for the long-term not for the six months term, not for the 12 months term, but for the long-term, right. The second thing I want to reiterate is that the PrivateBank is a very good bank, it’s a very good standalone bank, its better under CIBC ownership, much stronger, much broader ability to grow across its platform.

So we think we bring a lot to the party and we think that the long-term strategic interest of their shareholders and our shareholders are best served by coming together. Having said all of that, the markets clearly run, our goal is to be rational, our goal is to be disciplined and our goal is to be patient.

We are acting in the interest of our shareholders. That means building a North American franchise but that means also doing it in an economically prudent fashion and that’s all I will say today. They are a good bank, we have been working with them for a long-long time. We have got good integration plans underway but we will be disciplined and we will be patient when it comes to price.

Gabriel Dechaine

Okay, and then last one a clarification from Harry that the 5% of this after mitigation that’s for your segment not the total bank, correct?

Harry Culham

Apologies, yes absolutely its capital market netting in after tax.

Gabriel Dechaine

Okay, great. Thanks.

Operator

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

Sumit Malhotra

Thanks, good morning. And just to be clear on your filing of the NCIB, usually when you file for these things it doesn’t take very long for it to be approved. If you were approved, do you anticipate being active on how that file prior to having some kind of conclusion with private or would it have to wait until you know what the capital impact is going to be?

Victor Dodig

Sumit, that’s our management prerogative, so we know approved we will wait TSX approval, we will everything that we are doing is consistent with everything we have always said. The buyback is simply another avenue to deploy capital to our shareholders and we will do that at the time that we think it’s in the best interest of our shareholders.

Sumit Malhotra

And some are related to you gave us the confirmation the first question on the so called block away days that’s probably a better term on that that, but you postponed the shareholder in early December is there a timeframe in which you required to go back to shareholders with the offer which everyone is or does the June 29 date service all encompassing on that front?

Victor Dodig

June 29, date is the all encompassing date and it will up to the PrivateBankcorp’s directors to establish the next meeting day.

Sumit Malhotra

All right. okay, thank you for that. And then I just want to go back to David Williamson and this conversation around net interest margin. I think you told us the factors that are in place that had a larger impact this quarter, but bigger picture, I think just around the banking sector there has been a lot of excitement on what is higher interest rates in bond yields in Canada and the U.S. could due to net interest margin. But at least the way I am hearing it you are not really communicating to us that the fact that Canadian five year yields are up 50-ish basis points in the last three months is going to have a major positive effect for your net interest margin. am I hearing you correctly or there are some other factors that need to play out in order for NIM to benefit in Canada for CIBC?

David Williamson

Hi Sumit, you are right that higher rates are [Indiscernible] is just I think Victor referred to in his comments, we are structured on a tractor or later, so it just takes a while for it to coming into earnings. So the extensive rates are high and stay higher for a while it will start to come in. I think you will hear from us and the rest of community, rates have just been coming down for such an extended period of time, with a multiyear tractor, or just continued grind on that front. There might be signs that that’s about to reverse.

Sumit Malhotra

Thanks for your time.

David Williamson

Thanks Sumit.

Operator

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

Sohrab Movahedi

Thank you. Victor you mentioned that year is off to a good start and you expect you will be able to exceed the 5% EPS target year. Can I ask what your starting point for that number is?

Victor Dodig

The 5%?

Sohrab Movahedi

I mean what is the base, what half of 2016 base are you working off of?

Victor Dodig

Off of our earnings per share that we delivered in 2016, right.

Sohrab Movahedi

So what you would call just.

Victor Dodig

Yes, adjusted, right.

Sohrab Movahedi

Okay. And is there any assumption in that the private deal gets done?

Victor Dodig

The 5% target is a target that we think we can deliver on an organic basis in terms of growth.

Sohrab Movahedi

Okay, thanks. And then a very quickly for Laura. Laura you had noted on one of the slides that high LTV, low Beacon score with less than 1% of the uninsured portfolio. When you think about lost composition why would you say the expected loss in your I don’t know in our stress testing would be on that 1% of the portfolio.

Laura Dottori-Attanasio

Hey Sohrab. When we run our stress, we look at the whole portfolio and so I think I have gone through this. We run through the miles and severe scenarios, clearly that would be the segment of the population that would be hit if you will more severely. So are you looking for sort of you know revised stress numbers for that segment of the portfolio because what I can tell you from an overall expectation on loan loss is, we are not expecting to see loan losses increase in that particular segment.

Sohrab Movahedi

I guess what I am trying to get out is whatever the stress loss is, let’s say I’m just making up a number, 200 million would it be concentrated in this part of the portfolio?

Laura Dottori-Attanasio

No, so when we run our stress across the book as you can appreciate the largest segment of losses if you will or additional losses we would take in a severely stressed environment as I speak to Rita would be in the unsecured space. So first of course it be cards followed by the rest of the unsecured products that we have.

It continues to be when we run on those severe stress that the smaller amount of the losses if you will would continue to be in the mortgage portfolio. And so that number and I did speak to on a few quarters ago, of course that’s our mortgage book growth and economic conditions change. That number will change as well but it continues to be if you will the smaller of the numbers.

Sohrab Movahedi

Okay, so I mean just the 1% then is an interesting data point but it doesn’t factor into your risk appetite or risk management framework in any meaningful way.

Laura Dottori-Attanasio

Well it does in that, when we run our stress, we look at the whole product, on a product by product basis in the overall organization and then we also go in and do deep dive. So we do look at our at the margins if you will for that segment and we look at that as well to see under stress does it make sense and does it all sort of add up. So we do look at that closely and it does fall into our risk appetite.

Sohrab Movahedi

Okay, thank you. Maybe I’ll follow-up afterwards.

Laura Dottori-Attanasio

Thanks.

Operator

Thank you. The following question is from Doug Young with Desjardin Capital Markets. Please go ahead.

Doug Young

Hi, good morning. Just questions on regulatory capital and I apologize I have done some numbers quickly but I believe that the loans were up sequentially about 2% but your credit risk weighted assets were down 1%. So I am just trying to get a sense of are you making some changes to your portfolio in anticipation of the new Basel rule changes or can you talk a bit about some of the moving parts there. And then I did notice on page eight of the regulatory capital supplement that the other category of credit risk weighted assets was down 1.4 billion sequentially. Just trying to get a little bit of sense of what that relates to?

Harry Culham

I think on the credit risk RWA is what we did is you had fair amount of movement on the capital markets counterparty credit risk changes this quarter. So as a result of declines over there, that would have mitigated the increase in RWA growth. As far as other is concerned that the biggest driver of it there was just time [decay] (Ph) and we actually have that last quarter as well. So as we get and that can move on the quarter-by-quarter basis in this particular quarter that for us, which show that reduction.

Doug Young

So you said time decay?

Harry Culham

Yes.

Doug Young

Okay. And just was in the Capital Market segment was this more in anticipation of some changes is this kind of more proactive work that you’ve been doing or is this just general part of everyday business?

Harry Culham

But it’s a combination of that [Indiscernible], but market conditions in just a way that our time positions have moved.

Doug Young

Okay. And then just on the market risk component of that I think the full impact from the changes is effect Jan 1, so that would be in these numbers. Is that correct? Because I think there were some calculation changes that came through?

Harry Culham

There would be a small impact this quarter.

Doug Young

It wasn’t big okay. And then there is still operational risk impacts that are coming in June. Do you have any sense of what the implication or what size that could be.

Harry Culham

Well obviously we have interim models, we don’t give that level of granularity, but certainly when we look at our forecast moving forward, it would have an impact, but not a very material impact as far as CET1 ratio is concerned.

Doug Young

Okay, great. That’s all from me. Thank you very much.

Operator

Thank you. The following question is from Nick Stogdill from Credit Suisse. Please go ahead.

Nick Stogdill

Hi, good morning. Just a question on business banking or business lending. [Indiscernible] few months with new U.S. administration behind us. I’m just wondering if you give an update on feedback from your commercial and business plans in Canada. Do they feel more optimistic or do you get a sense of putting growth plans on hold, maybe looking differ investment spend context of the 11% growth delivered in Canadian Business Banking this quarter?

Victor Dodig

Hi, Nick. The growth that we produced in business banking it’s actually pretty consistent with the run we have had some period of time. A lot of that’s due to build on the relationship managers build on as we call it feed on the street. At this point I think everyone is still evaluating kind of what changes of the boarder mean, as far as trade and as far as opportunity early days yet. So I think from my perspective, seen any kind of systemic shifts and there is a lot of thought, lot of questions, lot of uncertainty potentially. We haven’t really seen any systemic change in business activity at this point.

Nick Stogdill

The pipeline still looks growth field sustainable?

Victor Dodig

Yes.

Nick Stogdill

Thank you.

Operator

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

Mario Mendonca

Good morning. Could you talk a little bit about the nature of the client activity in the Capital Markets Business that would have driven very strong equity derivative trading results? It does sound like it’s a fine activity, but as anything little more specific?

Harry Culham

Sure, Well good morning Mario. Firstly what I would say is the trading equity derivative business is a well diversified business here at CIBC. No doubt there were strong market conditions, you see an uptick year-over-year, but what is interesting is the breakdown of the equity derivative business. And as I mentioned well-diversified, we saw a very good amount of client activity in the equity linked note business, that business was up significantly year-over-year and quarter-over-quarter on the back of redemptions and other offerings. We saw very good client business we are building in U.S. and U.S. equity derivative business. And we also saw an uptick in North American options activity with core clients. This side of border has helped the borders. So it’s very well diversified activity with our core clients and the market conditions are favorable for that activity.

Mario Mendonca

So you wouldn’t highlight the total returns swaps in any way as the key driver of that big number then?

Harry Culham

No, in fact the TRS rated activities were about flat with previous quarters.

Mario Mendonca

Okay. A quick follow-up then, and this is more for Victor. I find the capital decisions that have been put in place, they are difficult for me to follow, clearly I am looking at this externally. So I am not going to have the level of insight that you do course. But having the drip in place, made it feel like the bank was maybe going into a capital conservation mode, but now I hear of the buyback and the ninth dividend increase in 10 quarters. So I’m having a little trouble understanding the capital decisions. Could you help me think this through?

Victor Dodig

Mario good morning. I can appreciate the minor complexities that arise when you look at all of that and say how do I make sense of it all. maybe I could just take it back to our view on the world because our view on the world informs our view on capital decisions. And I would probably characterize it as cautiously optimistic.

Let me start with the optimism, David talked about the business sentiment, Nick asked the question about how our clients are feeling. I think that business sentiment is improving. I think we have seen some concrete improvement and strafing in Alberta where our clients have reengineered their businesses and some confidence is building as the natural resources sector finds a better footing at a better price.

I think sentiments improving because of the pronouncements that are being made south of the border that are generally pro-growth. But I would say general in nature so far and that kind of leads me to the why do we have cautious optimism, we are cautious because the pronouncements are general and they are going to take time to implement and you have got pronouncement that are approaching a problem from two different ends of the spectrum in some instances like in tax policy.

And it’s also difficult to reconcile the pro-growth policies with the protection [indiscernible] on some of the trade files as well as how other countries will react to these policies. So you kind of go into this saying look our goal is always to have a strong capital position for our shareholders, given the political environment, given the transaction that we are looking and given the flexibility that we want to have to return capital to our shareholders if maybe in the form of a buyback.

At the same time our fundamental belief is to have a strong capital position which is why that drip is put in place a while back to deal with any potential downsides that the macro environment might deliver. People don’t see it today, the animal spirits are out there but they could come and when they come, they can be ugly and we want to just make sure that CIBC continues to be the safe harbor bank in the next financial crisis.

Mario Mendonca

So the buyback then has a real optionality element to it, is that fair to say?

Victor Dodig

I think that’s fair to say.

Mario Mendonca

Thank you for your time.

Victor Dodig

Thank you.

Operator

I would now like to return the meeting over to Victor.

Victor Dodig

All right, thank you operator. So it’s been a pleasure this morning to report on another strong quarter of financial performance for our bank and to provide you with an update on our progress against our strategic priorities. So on behalf of the CIBC executive committee, on behalf of our Board, I would like to thank the entire CIBC team for the passion they bring to work every day and their ongoing dedication to provide the very best service to our 11 million clients from our retail clients to our corporate clients. And I also want to thank our shareholders for their continued support. Thank you for joining us. Have a great day.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time. And we thank you for your participation.

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