Canadian Imperial Bank of Commerce
Q4 2012 Earnings Call Transcript

Published:

  • Operator:
    Good morning, ladies and gentlemen. Welcome to the CIBC F4Q Results Conference Call. Please be advised that this call is being recorded. (Operator instructions.) I would now like to turn the meeting over to Geoff Weiss. Please go ahead Mr. Weiss.
  • Geoff Weiss:
    Thank you. Good morning and thank you for joining us. This morning, CIBC’s senior executives will review CIBC’s F4Q and F2012 results that were released earlier this morning. The documents referenced on this call including CIBC’s F4Q news release, investor presentation, and financial supplement as well as CIBCS F2012 financial statements and MBNA can all be found on our website at www.cibc.com. In addition, an archive of this audio webcast will be available on our website later today along with CIBC’s full F2012 report which was released earlier this morning with our results. This morning’s agenda will include opening remarks from Gerry McCaughey, CIBC’s President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with a financial review; and Tom Woods, our Chief Risk Officer will close the formal remarks with a risk management update. After the presentations there will be a question-and-answer period that will conclude by 9
  • Gerry McCaughey:
    Thank you, Geoff, and good morning everyone. I will also remind you that my comments may contain forward-looking statements. Today, CIBC reported net income for F4Q of $852 million and diluted earnings per share of $2.02. The return on equity for the quarter was 21.7%. Adjusting for items of note, earnings were $2.04, up 15% from a year ago. For F2012 overall, CIBC reported net income of $3.3 billion and diluted earnings per share of $7.85. Return on equity for the year was 22%. During F2012 we strengthened our capital base while investing for strategic growth and returning capital to shareholders. We finished the quarter with a Basel III pro forma common equity ratio estimated at 9% and a Basel II tier one ratio of 13.8%. We increased our quarterly common dividend to $0.94 per share effective October, 2012; announced a normal course issuer bid to repurchase up to 8.1 million common shares or approximately 2% of shares outstanding. As of October 31, 2012, we have repurchased in excess of 2 million shares. Our progress in F2012 reflects our strategy which is to be a lower risk bank, to deliver consistent and sustainable earnings; as well as our strategic plan, which has four work streams. The first two elements are conditions precedent to our strategic plan. The third, our strategic plan, is how we deliver value. Our strategic plan has four work streams
  • Kevin Glass:
    Thanks, Gerry. My presentation will refer to the slides that are posted on our website, starting with Slide 5 which is a summary of results for the quarter. My comments will focus on F4Q and will [give] you an overview of our F2012 performance. Overall we produced solid results for this quarter. Net income after tax was $852 million on a reported basis and $858 million on an adjusted basis. This resulted in reported earnings per share of $2.02 and adjusted earnings per share of $2.04. Our retail and business banking franchise experienced solid revenue growth and is successfully executing on its strategies, focused on accelerating profitable revenue growth and deepening client relationships. Wholesale banking delivered strong results in challenging market conditions. Wealth management had record net sales of long-term mutual funds and we had another quarter of positive operating leverage even as we continued to make incremental investments in our business. Our capital ratios continued to lead the industry. We finished F4Q with a tier one capital ratio of 13.8% and a Basel III common equity ratio estimated at 9.0%. During the quarter we had five items of note
  • Tom Woods:
    Thanks, Kevin. On Slide 20, loan losses in F4Q were $328 million or $275 million on an adjusted basis, versus $317 million in F3Q. Reported loan losses included a $53 million provision in our runoff US leveraged finance portfolio. This was due to our provision in a single account. The balance on this loan is now $71 million and the balance in the US leveraged finance portfolio including this loan is now $91 million. Loans to these companies were made before 2008 and we have exited this business. We had good credit performance in our retail and wholesale portfolios. In US real estate finance, loan losses were down $14 million versus F3Q. In [cards losses were down $11 million. In commercial banking, losses were down $7 million and in CIBC First Caribbean, losses were down $6 million. Slide 21
  • Geoff Weiss:
    That concludes our prepared remarks. We’ll now move to questions. To give everyone an opportunity to participate, please keep it to one question and then re-queue. Operator, can we please have the first question?
  • Operator:
    Certainly. (Operator instructions.) The first question is from Steve Theriault of Bank of America Merrill Lynch. Please go ahead.
  • Steve Theriault:
    Thanks very much. I have a question for David Williamson. David, can you give us a bit of an update on your retention efforts with respect to First Line? How are you doing relative to targets? What kind of spreads are you getting on renewals – are you getting closer to broker-type or closer to branch-type pricing? And if you could also speak to your outlook for the margin next year that would be helpful. Thanks.
  • David Williamson:
    Certainly, Steve. So we’re really pleased with how the conversion of First Line is going into the CIBC branded products. The clients are showing a strong propensity to convert into the CIBC brand, so as far as conversions go we’re significantly at this point exceeding – it’s early days but we’re significantly exceeding the conversion target that we shared when we outlined our decision to exit First Line as a channel. So that’s the conversion level is going very well. And on spreads, we haven’t given the actual target on spreads but we do have an internal target and we’re exceeding that by a fair margin as well; and quite frankly we are doing quite well compared to the branch spreads. So First Line couldn’t be going much better frankly, as far as the conversion is going. As far as looking forward into next year on spreads, the way things are going so far there’s no reason to believe it wouldn’t really now just link to how the overall market is doing and the degree of competitiveness in the market because it’s showing there is that propensity to convert. It’s going better than we would have hoped and spreads, as I say, are going well. So I think we’re now just going to tie into where the market goes. The other thing that I’d highlight as one of the key elements of what we’re trying to do here is when the clients come into CIBC is to then build that deeper, more sustained relationship. So we have put in place a leads program and some incentives to make sure that when those clients do get a CIBC mortgage we’re welcoming them warmly and building that multi-product relationship. So I’m happy to report it is going well.
  • Steve Theriault:
    Thanks, David.
  • Operator:
    Thank you. The next question is from Gabriel Dechaine of Credit Suisse. Please go ahead.
  • Gabriel Dechaine:
    Hi, good morning. Just looking at retail and business banking, your expenses are up less than 1% year-over-year yet you talk about expenses being up due to investment in strategic business initiatives. So I guess the sense that you’re investing but you’re also generating some cost saves along the way – is that a trend you expect to continue in F2013, like that level of expense growth? And then I’ve got a follow-up.
  • David Williamson:
    Let me take that first question. You’re absolutely right. Our expense growth in F4Q relative to the year before is 0.7% and for the full year it came out at 0.6% year-over-year, F2012 compared to F2011. So you’re absolutely right – that is low relative to expectations, and we have been over the last few quarters been able to identify offsetting efficiencies. As we’re working through process improvement opportunities items have surfaced that have allowed us to offset the elevated spending. So two comments going forward
  • Gabriel Dechaine:
    Thanks. My other question is for Gerry. On the buyback, I guess over time the capital ratios keep going up, people might expect that to be enhanced or increased. Do you think leverage is a constraint against upping your buyback or the share repurchases you have earmarked in F2013? I just want to get a sense for the upside potential if any to your existing NCIB?
  • Gerry McCaughey:
    Yeah, our leverage ratio is in line with the industry at this time. We are keeping an eye on the eventual destination of leverage ratios under Basel III but I don’t see it as a constraining influence to our actions today. And in the future, when we look at offsetting activity in terms of changes that are taking place when Basel III comes in from the leverage ratio viewpoint we also believe that we have a fair bit of room to move.
  • Gabriel Dechaine:
    Thank you.
  • Operator:
    Thank you. The next question is from Peter Routledge of National Bank Financial. Please go ahead.
  • Peter Routledge:
    Hi, a couple questions for David just on the flows of loans in your business. It looks like the runoff from First Line was $3.3 billion and then you filled in a pretty strong quarter in terms of origination at the branch, $2.7 billion. And what put you into positive loan growth was quite strong business credit, I guess net new loans looked like they were around $1 billion. So I’m just trying to play it forward next year. If household borrowing, household demand for credit really does fall off, a couple questions
  • David Williamson:
    Hi, Peter. Yeah, so the dynamics you’ve got there are right. When we exited First Line we said the overall mortgage balance was going to be down in percentage terms low single digits. As our CIBC branded grew it offset First Line, and that’s what’s playing out now although actually it was down 0.1% net-net. And that’s because I guess the stronger conversion experience that we’ve had. So to your point about looking forward, yeah, First Line – that is indicative of kind of the burnout rate. There is going to be some degree of variation but over a multi-year period First Line will burn off at a rate, and recent experience is probably indicative of that near-term rate. So then it just comes down to what’s the industry going to grow in mortgages, and my job is to grow at industry or better type of rates. I can’t really control for macro factors. And what we did this quarter is did just that, so on mortgages on a year-over-year basis we grew over 10% in our own brand. Now there’s a wind assist there as far as the First Line mortgages converting over but if you pull that out we are still substantially ahead of the industry growth rate in mortgages which for the first three quarters is over 6%. We were well clear of that even excluding the First Line. So I can’t speak to what the economy is going to do going forward but we do seem to be set up well to grow at at least industry rates, whatever they may be. And we’re not doing it by giving it away either, right? Our NIMs are up quarter-over-quarter and they’re up year-over-year. We haven’t had that NIM growth for some extended period of time. So right now, I can’t speak to the economy going forward but we seem to be well positioned both on spreads and volumes to do relatively well as the First Line book burns off. The other thing I’d point out is we’ve now introduced a home power plan so we’ve now got the product that everyone else had before, which is the mortgage and the home equity line of credit. So now that that’s been rolled out nationally that’ll help our HELOC growth as well.
  • Peter Routledge:
    How sustainable is the performance in business credit? Can you get $1 billion in net new a quarter? Or is that an outperform kind of quarter?
  • David Williamson:
    No, I think this quarter was actually slightly lesser rates than what we’ve grown over the last couple years. We’ve had two, three years of comparatively quite strong growth in business lending. This quarter the same again, and maybe I should just do a bit of decomposition here. We have made the proactive decision to take the foot off the gas so to speak in commercial mortgages. So when you look at our market share in business lending and our volume growth, that’s with us pulling back in commercial lending. If you strip that away, our business lending growth on an average basis in F4Q compared to a year ago is over 11%. So the team is good, the focus is good. I’d like to believe that we’ll be able to continue that kind of relative peer growth rate.
  • Peter Routledge:
    Thanks for your time, I appreciate it.
  • Operator:
    Thank you. The next question is from John Aiken of Barclays Capital. Please go ahead.
  • John Aiken:
    Good morning. No offense, David, but I actually don’t have a question for you. Richard, can you talk about within your segment the growth in trading securities and essentially what’s underlying that, and whether or not that’s the main principal attraction for the common equity growth that your segment has had year-over-year?
  • Richard Nesbitt:
    First I’ll let Kevin take that question and then I can follow up.
  • Kevin Glass:
    John, let me just chat with you briefly about trading. If you go to Page 3 I think we’ve got pretty high trading interest income which is up a lot, and then the noninterest income is down. So you need to look at that on a consolidated basis. If you look at it on a net basis we had particularly strong trading revenue this quarter so that’s what drove a slightly lower tax rate but also higher trading revenue particularly in the [derivatives] book.
  • John Aiken:
    But more specifically the trading security balances are up almost 30% year-over-year.
  • Richard Nesbitt:
    So I’m just going over this with our CFO here for wholesale, John, and really the answer is markets are up and we had higher levels of activity. We had quite low levels of activity in the first half of F2012 and much higher levels of activity in the second half of F2012, plus the markets are up.
  • John Aiken:
    So Richard, this is largely client balances-related and not taking on positions yourself?
  • Richard Nesbitt:
    Absolutely. While we’re engaged as everybody else is in facilitation trading, those have not gone up materially and those are just transitory balances that we would maintain.
  • John Aiken:
    And I apologize, I have not leafed through the MD&A but Tom, has this had any impact on average borrow levels?
  • Tom Woods:
    No, the borrow is still under $6 million so it’s been sort of $6 million to $7 million for the last couple years.
  • John Aiken:
    Great, thank you very much.
  • Operator:
    Thank you. The next question is from Brad Smith with Stonecap Securities. Please go ahead.
  • Brad Smith:
    Yes, thanks very much. I just wanted to get back a little bit to First Line mortgages and to the total mortgages. If I’m reading this correctly, the aggregate mortgages of $145.2 billion at the end of the quarter was basically unchanged from a year ago and the First Line has come down quite significantly, about $7 billion. The earlier comment about how that conversion is working well, I guess I’d like a bit more clarity on that because if the total is not growing at all then where are you going to end up at the end of the day on a market share basis? Or maybe another way to say it is when do you think your aggregate mortgage balance is going to actually start to rise?
  • David Williamson:
    So Brad, I guess the key thing we’re looking for in some respects is a quality versus quantity type of thing. So the First Line conversion, when you think about it, we’re talking about 25% staying with us and at a markedly higher margin. What we’re actually saying is there’s quite a bit more than 25% staying with us and the margins are quite a bit higher than what we expected. So if you start retaining a substantive amount at a higher spread and you have a reduction in your expense base because his two-platform and two-product base goes away, what you end up seeing is the impact on [NIAT] all in from taking those $50 billion off and replacing it with CIBC branded mortgages is pretty moderate – and that’s even putting aside the fact that we’re no longer wholesale funding $50 billion of balance sheet. So this conversion completely synchs with the strategy of saying “Let’s not have single-product relationships and get deeper relationships,” in so doing less attrition, higher margins and both sides of the balance sheet type of things. So when I talk about First Line going well it’s a higher percentage of them staying with CIBC, great spreads being quite a bit wider and getting up to branch levels, and then losing the expenses associated with First Line; and then just the side benefit associated with being a lower-risk bank of just having less balance sheet to fund. Just net-net this adds up to a whole lot of good things.
  • Brad Smith:
    Can we just sort of square that in with your earlier comment about you NIM outlook? The way I interpreted what you said, David, is that you didn’t see any real lift coming from the conversions and that you were more likely to see your NIM move with the market. So is that consistent with what you just said about higher conversions and higher margins on the conversions?
  • David Williamson:
    No, let me clarify a bit. What we’ve got is two offsetting forces – luckily it’s offsetting the right way; one negative force being the lower interest rate environment just compressing our net interest margins which you’re seeing in the whole industry in the reported results today. But we’ve got the offset that by making this move, taking what was $50 billion of assets and swinging a big proportion of them into higher margin products, that’s giving us the lift to our net interest margins. So that’s the fuel that’s allowing us to show a comparatively stronger spread. So our mission to accelerate revenue, this fits right in with it where we’ve got a lower quantity of mortgages to fund – so to your point, that mortgage line is not going to be moving very much over the next three years. But what’s going on is we’re replacing single product, low-spread, wholesale-funded mortgages with deeper relationship CIBC branded, higher spread products and that’s what’s helping our NIM elevate relative to peers.
  • Brad Smith:
    So you would expect your net interest margin performance next year on a relative basis to outperform your peers because your conversions are ongoing.
  • David Williamson:
    That’s right.
  • Brad Smith:
    Okay, and I must have misinterpreted what you said earlier.
  • David Williamson:
    We’ve got pressure like everyone else as far as the low interest rate environment but we do have this tailwind that’s being provided by the conversion of the First Line.
  • Brad Smith:
    Great, thanks very much, David.
  • Operator:
    Thank you. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead.
  • Michael Goldberg:
    Thanks. On the Treasury impact on retail and business, I want to clarify
  • Kevin Glass:
    Michael, it’s Kevin. I think in terms of the impact on overall interest margins, the answer is it doesn’t really impact overall interest margins because the [big] delta on a year-over-year basis was [AFS] gains. So in F4Q of last year we had very high or higher than usual [AFS] gains whereas this quarter we’ve had very low [AFS] gains, and that doesn’t flow through in our eyes. So on a consolidated basis it’s not going to have an impact.
  • Michael Goldberg:
    But just in terms of the impact of that unmatch, would it alone have been a positive or a negative?
  • Kevin Glass:
    Michael, I think it would probably be best if we take that offline and work through the reconciliation together.
  • Michael Goldberg:
    Sure, okay.
  • Operator:
    Thank you. The next question is from Brian Klock of Keefe, Bruyette & Woods. Please go ahead.
  • Brian Klock:
    Good morning, thanks for taking my question, guys. I was wondering if I could follow up on the earlier question on the trading revenues. Just obviously there was a pretty significant spike on the [NII] side from the trading book. When I look at the total securities portfolio which includes [AFS] and your trading book, the yield in the quarter went from 2.47% in F3Q to 3.38%. So I’m just wondering what kind of securities actually did you put in the trading portfolio that helped drive that yield up so much higher.
  • Kevin Glass:
    It’s Kevin Glass. So when you look at trading, I mean you’ve got to look at both interest income as well as noninterest income. And so if you put them together it wasn’t a particularly big spike in the revenue but we did have a change in business mix. Our equity derivative business was particularly strong in the quarter as a result of particular transactions that didn’t particularly drive up the balances, and that’s what probably drove the higher yields.
  • Brian Klock:
    Okay, that’s helpful. Thank you.
  • Operator:
    Thank you. The next question is from Darko Mihelic of Cormark Securities. Please go ahead.
  • Operator:
    Thank you. I would now like to return the meeting over to Mr. Weiss.
  • Geoff Weiss:
    Thank you, Operator. That concludes our call. Please contact Investor Relations with any follow-up questions. On behalf of the team at CIBC I’d like to wish everyone a happy and safe holiday season and new year. Thanks very much and have a good day.