Canadian Imperial Bank of Commerce (NYSE:CM)
Q2 2017 Earnings Conference Call
May 25, 2017 8:30 AM ET
John Ferren – Senior Vice-President, Corporate CFO and Investor Relations
Victor Dodig – President and Chief Executive Officer
Kevin Glass – Senior Executive Vice-President and Chief Financial Officer
Laura Dottori-Attanasio – Senior Executive Vice-President and Chief Risk Officer
David Williamson – Senior Executive Vice-President and Group Head, Retail and Business Banking
Steve Geist – Senior Executive Vice-President and Group Head, Wealth Management
John Aiken – Barclays Capital
Nick Stogdill – Credit Suisse
Meny Grauman – Cormark Securities
Sumit Malhotra – Scotia Capital
Gabriel Dechaine – National Bank Financial
Steve Theriault – Eight Capital
Doug Young – Desjardins Capital
Sohrab Movahedi – BMO Capital Markets
Darko Mihelic – RBC Capital Markets
Good morning, ladies and gentlemen. Welcome to the CIBC Quarterly Financial 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.
Thank you. Good morning, and thank you, everyone, for joining us this morning. CIBC’s senior executives will review on today’s call CIBC’s results for the second quarter of 2017 that were released earlier this morning. The documents referenced on this call, including CIBC’s news release, investor presentation and financial supplements, can all be found on our website at cibc.com. An archive of this audio webcast will be available on our website as well 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 as usual 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 of the Bank.
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.
Thanks, John. Good morning, everyone, and thank you for taking the time to join us on a busy day for Canadian Bank reporting. This morning CIBC’s reported solid second quarter results, our adjusted earnings are $1.1 billion, up 10% from a year earlier, supported by balanced revenue growth and strong credit performance. We delivered a return on equity for the quarter of over 18% and improved our industry leading CET 1 ratio to 12.2%, which positions us well to maintain a strong capital ratio upon the closing of our acquisition of the PrivateBank next month.
The PrivateBank is something we’re excited about it, and we’ll have more to say about our strategically significant investment at the conclusion of my remarks. While delivering good financial results, we also made strong progress in the quarter against our strategic priorities of improving client experience, simplifying our bank and delivering innovation that enables our clients to bank where, when and how they want.
I’ll provide a few examples of where we are advancing our strategy, as they review the performance of our business segments. Over the past month, developments within the alternative lending space of the Canadian housing market has been a focus for the sector. While these issues don’t reflect the Canadian housing market in general, or the performance of the broader Canadian economy, the market has understandably been assessing potential implications for the financial system as a whole.
It is important to note, the CIBC does not originate subprime or even near prime mortgage loans, is a large diversified and predominantly core deposit funded financial institution. We also don’t face the same funding challenges as some of the alternative lending business models. That said, we continue to closely monitor the housing market, as David and Laura will speak to later on the call.
Now, let’s turn to our business unit results. Retail and business banking reported year-over-year adjusted earnings growth of 4% this quarter, with earnings increasing to $648 million. Strong volume and record growth in funds managed more than offset a decline in net interest margins to contribute revenue growth of 4%. Credit performance was also strong across all product areas. Business investment initiatives contributed to higher expense growth than recent quarters and operating leverage was slightly negative as a result of February being a shorter month than last year.
Subsequent to the quarter, CIBC was recognized by Forrester Research is having the highest score for mobile banking functionality among the major Canadian retail banks. We are proud to receive this distinction for the fourth year in a row, as we continue to innovate and deliver a better banking experience to our clients. An example of this innovation is the introduction this past quarter of a voice-enabled search feature on CIBC’s mobile banking app. We are first to market with this technology, which offers a personalized and convenient way for our clients to bank on their phone.
My colleague, David Williamson, is here this morning to answer any questions you might have about retail and business banking and innovation. Our Wealth Management business reported another strong quarter, with adjusted earnings of $155 million, up 34% from the prior year. Supportive market conditions and client activity contributed to strong revenue growth of 13%.
During the quarter, CIBC Atlantic Trust was recognized by Private Asset Management magazine with two awards; best investment platform performance and best trust in the state’s division. This is the seventh straight year in which a CIBC Atlantic Trust has been recognized for excellence in the U.S. high net worth segment.
In addition, as part of our strategy to deliver a more integrated experience for a Canadian high net worth clients, we have completed a co-location to CIBC private banking Wood Gundy locations across our country. And earlier this month, we launched the private wealth management brand campaign, an important initiative focused on connecting with our high net worth clients and understanding their banking needs. My colleague, Steve Geist is here this morning to answer questions on our Wealth Management business.
Turning to capital markets. Adjusted earnings for the quarter was $292 million, up $32 million from a year ago. Following a very strong first quarter, market volatility was lower in the second quarter, resulting in a lower client-driven trading activity in the last quarter and a year ago. While revenue was down 3% from last year, loan recoveries this quarter compared to elevated provisions in 2016 supported positive earnings growth of 12%.
During the quarter, our investment banking team led an IPO with iconic Canadian net worth company, Canada Goose, and then $391 million, this is the largest IPO to-date in 2017. Other notable transactions this quarter saw CIBC act as a joint bookrunner and co-lead arranger on a US$3.5 billion credit facility for CPPIB Capital; joint bookrunner on a $1.5 billion bond offering for Bell Canada; and joint bookrunner on a US$500 million and C$325 million dual tranche bond offering for TELUS. My colleague, Harry Culham, is here this morning to answer questions on our Capital Markets business.
In summary, we continue to see good momentum across our business and evidence that our strategy is working. While remaining focused on the near-term, we are taking action to ensure CIBC performs well over the long-term by be – by remaining relevant to our clients and creating a stronger and more diversified bank for our shareholders.
On that note, we’re very pleased that earlier this month PrivateBancorp shareholders voted overwhelmingly in favor of the combination of our two banks. This is a clear recognition that like us, they are shareholders see value in our merger. In the PrivateBank, we are acquiring a high-quality middle market commercial and private banking franchise with strong wealth management capabilities. They have a long track record of creating shareholder value through strong earnings growth and their asset-sensitive balance sheet is well positioned for higher profitability, as interest rates rise in the United States.
The banks experienced management team led by Larry Richmond has a high-touch relationship-based service model that is very much aligned with CIBC’s client-focused culture and strategy. With its presence in attractive markets across the U.S. Midwest, this strategically complements CIBC’s existing presence in the United States, the addition of the PrivateBank to the CIBC family, will immediately accelerate our U.S. strategy. And importantly, it will provide a strong platform for us to grow from and service our clients’ needs throughout North America.
We are now focused on obtaining the remaining regulatory approvals and finalizing our integration plans, as we work toward closing the transaction in June. We look forward to continuing to work closely with the PrivateBank team to complete the transaction and realize the full benefits for our shareholders, our employees, our clients and our communities.
Now, I would like to turn the call over to my colleague, Kevin Glass.
Thanks, Victor. My presentation will refer to the slides that are posted on our website starting with Slide 5. CIBC had solid results this quarter. We reported net income of $1.1 billion and earnings per share of $2.59. Items of note during the quarter, which included transaction and integration-related costs associated with our pending acquisition of the PrivateBank reduced our reported earnings by $0.05 per share.
After adjusting items of note, our net income was $1.1 billion, EPS of $2.64, was up 10% from a year ago, our Basel III CET 1 ratio grew to 12.2%, and our return on equity was up 18%.
Slide 6, provide an overview of the PrivateBank acquisition, which is expected to close next month. We expect our CET 1 ratio to remain above 10% after closing and our leverage and liquidity ratios will continue to exceed regulatory minimums. We anticipate incurring total transaction and integration costs in the range of US$130 million to US$150 million and we report these costs as an item of note in our quarterly results.
In terms of financial impact, we expect the transaction to be accretive by the end of the third year. As Victor mentioned in his remarks, the PrivateBank has delivered consistent results, including strong top line revenue growth, effective cost management, and good credit performance.
The PrivateBank’s well-diversified loan portfolio was $16 billion at the end of March, up 16% year-over-year, about 96% of the loans are variably priced and about 70% are tied to the one-month LIBOR. Deposits of $17 billion at the end of March were up 15% year-over-year. The deposit book consists largely of money market balances, savings account, and demand deposits.
Our billings in loans booked over the past few years, the PrivateBank has grown its earnings per share by an average of 18% annually reduced its mix ratio from 54% to 51%, and increased its ROE from 10.9% to 11.4%.
Balance of my presentation will be focused on adjusted results, which exclude items of note. We’ve included slides with reported results in the appendix of the presentation.
Let me start with the performance of our business segments beginning with the results for retail and business banking on Slide 7. So Retail and Business Banking recorded another quarter of solid earnings with good top line growth, partially offset by an increasing expenses.
Revenue for the quarter was $2.2 billion, up 3% from last year, driven by growth in both personal and business banking. Revenue in the second quarter of last year benefited from one additional day in February.
Personal banking revenue of $1.8 billion, was up 3% from the same period last year. Performance benefited from strong volume growth across all products, partially offset by one less day in the current year and narrower spreads. Total asset growth was a 11%, led by residential mortgage growth of 12%.
Our personal lending portfolios, including cards grew 5%, as we continue to see improving results in this area. Personal deposits and GIT growth of 7% benefited from promotions carrying over from the first quarter.
Business Banking revenue was $447 million, up 6% from last year, driven by strong lending and deposit volume growth and higher credit-related fees, partially offset by narrower deposit spreads impact of the shorter quarter. Business lending balances, as well as business deposits and GITs were up a 11% from the same period last year.
Other revenue of $7 million, were down $7 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 $196 million, down $9 million from the prior quarter, largely due to lower loss rates. Loan losses were down $3 million, or 1 % from the same period last year, largely due to lower loss rates, partially offset by portfolio growth in cards and personal lending.
Non-interest expenses were $1.1 billion, up 4% from the prior year. Expenses were somewhat higher this quarter as a result of investments in strategic growth initiatives to support our transformation into a modern, convenient and innovative bank. Operating leverage this quarter was negatively impacted by one less day.
Net interest margin was down 3 basis points sequentially, mainly due to business mix, reflecting strong mortgage growth. Spreads in our mortgage portfolio continued to be stable. Retail and Business Banking net income was $648 million, up 4% from the same period last year.
Slide 8, shows the results of our Wealth Management segment. Revenue for the quarter was $659 million, up $76 million, or 13% from the prior year, driven by strong performance across all businesses. Retail brokerage revenue of $352 million was up $40 million, or 13% from a year ago due to higher fee-based revenue, largely driven by asset growth.
Asset Management revenue of $207 million was up $28 million, or 16%. This was largely due to higher assets under management, resulting from market appreciation and strong net sales of long-term mutual funds.
Private Wealth Management revenue of $100 million was up $9 million, or 10%, mainly due to growth in average assets under management and funds managed. Non-interest expenses of $460 million were up $31 million, or 7%, primarily due to higher performance-based compensation.
Operating leverage was strong at positive 5.7%, results of solid business performance in well-contained expense growth. Net income for the quarter was $155 million, up $40 million, or 35% from the same quarter last year.
Turning to Capital Markets on Slide 9, we produced solid well-diversified results. Revenue this quarter was $733 million, down $23 million, or 3% from the same quarter last year. Global markets revenue of $407 million was down $62 million from the prior year, as a result of lower revenue from interest rate, foreign exchange and commodities trading, and higher reserves against derivative counterparties.
Corporate and Investment Banking revenue of $326 million was up $30 million from the prior year, driven by higher investment portfolio gains, as well as higher revenue from U.S. real estate finance and corporate banking, partially offset by lower equity underwriting activity.
Reversal of credit losses was $5 million in the quarter, compared with the provision for credit losses of $81 million in the prior year. The year-over-year improvement was attributable to the better performance and outlook for the oil and gas sector.
Non-interest expenses of $363 million were up $17 million from the prior year, primarily due to performance-driven compensation and higher spend on strategic initiatives. Net income of $292 million was up $32 million from the prior year.
Slide 10, reflects the results of our Corporate and Other segment, where net loss for this quarter was $25 million, compared with a net loss of $36 million in the prior year, largely due to higher revenue in CIBC, FirstCaribbean and strong credit performance. We expect to report improved results in the Corporate and Other segment going forward, but the decline in tab [ph] revenue expected for Capital Markets will be offset in Corporate and Other.
Turning to Slide 11, we further strengthened our capital position over the past quarter. Our CET 1 ratio was 12.2% as of April 30, up 30 basis points from the prior quarter. The increase was driven by a solid organic capital generation and the impact of share issuance through our dividend reinvestment and employee share-based plans offset to a certain extent by an increase in risk-weighted assets and the impact of the Basel 1 for adjustment.
For the capital, we’ll be issuing in the PrivateBank deal. We will continue to be very well-capitalized and in a strong position to maintain our balanced capital deployment plan, which includes investing for future long-term growth and returning capital to our shareholders, while maintaining a prudent buffer for future regulatory changes.
With that, I’ll turn the call over to Laura.
Thanks, Kevin, and good morning, everyone. So Slide 13, begins with our loan loss performance. You will see that loan losses this quarter were $179 million, that’s down $33 million quarter-over-quarter, mainly due to lower losses in our retail FirstCaribbean and Corporate loan portfolios, including a larger reduction in our collective allowance. Our loan loss ratio was 25 basis points compared with 26 basis points in the prior quarter.
Turning to Slide 14, new formations were $389 million, down slightly quarter-over-quarter. Growth impaired loans were $1.3 billion, or 40 basis points as a percentage of growth loans and acceptances, which is down $85 million, or 4 basis points from Q1, mainly due to a decrease in the oil and gas sector, which was partially offset by the impact of the U.S. dollar appreciation.
Slide 15, provides an overview of our Canadian residential mortgage and HELOC portfolios in Canada, the Greater Vancouver area, and the Greater Toronto Area. 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 16, shows beacon and loan-to-value distributions for the $11 billion of uninsured mortgages originated in the second quarter. Of that amount, approximately 43% were to clients in the GTA and 14% to clients in the GVA. Average beacon scores of new clients continue to be in line with our existing client, an average loan-to-values of new originations also continued to be lower than the national average of 64% with 58% in the GVA and 62% in the GTA.
Slide 17, shows our beacon and loan-to-value distribution for our overall Canadian uninsured residential mortgage portfolio. The Vancouver and Toronto markets continue to have better credit profile than the Canadian average. Beacon score distributions are towards the higher-end and average loan-to-values were 48% in the GVA and 51% in the GTA, both lower than the national average of 55% and with distribution towards the lower end.
On Slide 18, we have our Canadian credit card and unsecured personal lending portfolio. On a year-over-year basis, the late-stage delinquency rate of our Canadian cards portfolio was up, driven by a combination of higher unemployment in the oil provinces and credit migration in the rest of the portfolio.
That said, the rate has stabilized and was down slightly on a quarter-over-quarter basis. The late-stage delinquency rate for our unsecured personal lending portfolio improved on both the quarter-over-quarter and year-over-year basis, mainly driven by good quality growth.
Slide 19 shows the distribution of revenue in our trading portfolios, as compared with VaR. We had all positive trading days this quarter the same as last quarter. Our average trading VaR was $6.3 million compared with $6.1 million in the first quarter.
And now, I’ll turn things back to John.
Thank you, Laura. So that concludes our prepared remarks. We’ll now move to questions.
Thank you. [Operator Instructions] The first question is from John Aiken of Barclays. Please go ahead.
Good morning. David, with the announcement that your Canada is going to be stepping away from the Aeroplan rewards program. I was wondering, I know this is early days, but what’s your thoughts on, I guess, converting the portfolio that remains with CIBC on to your own platform. Is this what the – is this what you expect and how do you think you go about achieving that?
Hi, John, good morning. So I guess, if you look at what’s been announced at Aimia and Air Canada from its business as usual till 2020. In addition to that, Aimia has indicated they’re looking to continue to offer strong redemption offer post 2020. And I guess, more of a subjective matter, but if you think of the importance of the Aeroholders too not only Aimia, but also to Air Canada, given their loyal customers of that airline.
So, I think, there’s change here. But it’s early days to say, what would happen post 2020, again, given the importance of the aero customers to Air Canada. The initial reaction from clients has been quite muted, I guess, in part because of those factors.
So we wouldn’t look to precipitate a conversion. What we’re really looking to do since – really since the sale of half a book is to offer clients an option, right. So they have that option to them. If they’re Aeroplan loyalists and are comfortable with that program, we offer that program will continue to do that. If the – if clients are more comfortable with the optionality on the application of travel points, we have Aventura. So we would put it, we wouldn’t do any proactive, but it would really be over the clients as to which programs do they feel best meets their needs.
I guess, David, as a follow-up question to that is, since the sale of the portfolio, have you seen a migration of your remaining clients from the Aeroplan to Aventura even the CIBC has not been pushing that?
Yes, it’s an interesting question. Actually, what we’ve seen is the Aeroplan book has been remarkably stable. It’s been remarkably sable through the piece. What we have seen is remarkable growth in the Aventura book on to itself quite substantial compound growth, where it’s now, the client base in Aventura is quite a bit bigger than the client base we have in Aeroplan the Aimia card.
So what we’ve seen is not really a big transfer of clients from one card to the other. The Aeroplan book has been pretty stable. We’ve just seen the Aventura book be popular with Canadians and have growth on to itself.
Thanks, David. I’ll requeue.
Okay. Thanks, John.
Thank you. The following question is from Nick Stogdill of Credit Suisse. Please go ahead.
Hi, good morning, Sticking with you David. In the release you highlighted that 30 banking centers have been transformed a new formats giving the shifting client trends. So a couple of questions on that. Are these new formats smaller and lower cost? Are those changes taking place predominately in major cities? And do you see the same opportunity for branch transformations and maybe the smaller towns and cities and rural areas? Thank you.
Hi, Nick, good morning. Yes, the transformations are really more so on the urban centers. They are a smaller footprint sometimes. I mean, the banking center in my neighborhood same footprint now just a different layout. So it’s in some respects less about the square footage. It’s more about the layout. And by that, I mean, it’s now we recognize in our banking centers is about advice, it’s about the higher value kind of transaction investment decisions, mortgage decisions, and much less about paying a bill, picking up cash, that type of thing.
So the layout will not have customer service rep stations. It will be more you greeted at the door and you’re looking primarily for advice of that point in time. So we’ll have office space to talk to about your needs. So new builds would likely be smaller in space, but the conversion is taking the existing space and just resulting in meeting needs in a different way.
So much more open format and not with the teller stations at the back that type of thing. It’s more of an urban focus, that’s where the growth is, and that’s where we’re applying our dollars more effectively.
And then just the – if the size is the same as the head count and the branch come down in these new formats, or is there less employees that you’ll be staffing?
That’s an interesting point too. Actually, it’s a bit of a conversion in a sense. So that the total staffing is not different over time. We’ve been talking about our back to front changes in our staffing levels. So service positions are decreasing. So, again, service being CSR more transactionally oriented or lower value transactions, that’s down. But we’ve been investing in our sales force and advisory front, our financial advisors and Imperial Service and otherwise.
So that’s what helps our revenue. So while keeping our costs kind of consistent, we’ve been able to increase revenue by just putting more of our dollars towards advisory and sales force.
Okay. Thank you.
Thank you. The following question is from Meny Grauman of Cormark Securities. Please go ahead.
Hi, good morning. I wanted to ask a housing question, because why not. The growth that you’re seeing in the GTA is very strong, and just wanted to ask about the outlook considering some of the changes that were recently announced by the provincial government. So you’re – for the most recent quarter, you grew 24% year-over-year on the GTA, and how do you see that progressing over the next few quarters with these rule changes coming into play?
Hi, Meny, it’s David, again. So hard to know at this point in time. We are seeing some regional differences. Vancouver market cooling, Toronto market heating, but that was prior to the recent changes. Just I’d say it’s early to know what the impact of that will be. I would think it will moderate the growth we see in the Toronto market, but we’re monitoring to see what it actually does do. But I’d say at this point, we’re just a bit early to be able to comment on it.
Okay. And then just if I can follow-up on expenses you highlight higher costs in retail and business banking. And I’m wondering few things, are there some specific initiatives that you can highlight for the quarter that would have sort of hit that would have pushed things up that are notable like you just talked about the 30 branches, is that part of the expense story for this quarter in any meaningful way?
And then, more broadly the lumpiness in expenses, how much visibility and control do you have over the expense, as they develop like on a particular quarter? Do you see those jumps happening ahead, or does it – is it just a function of – is it controllable or not, I guess, that’s the question?
Right, okay. So let’s just take the nature of the spend. Now, there’s certain lumpier kind of activities we’re putting in new telephony system, we’ve talked about that. We’re putting a new front line system and that drives the deeper relationships, facilitates conversations that’s our compass system. So those are lumpier type of activities.
And yes, they’re highly predictable like we can see how they flow through. And there might be some, as you put a lumpiness is certain programs come off and certain programs come on.
I think, one underlying theme for investment is the one you touched on, which is the conversion of our bank to meet the modern needs of clients, which as Victor said in his opening comments, are about allowing our clients to bank when, where, and how they want to, which means a multi-channel offer, which means integrated multichannel, which we need to build the ability for clients to go between channels and for us to know them and offer personalized service in multiple channels and also speaks to the need to build out the remote and digital channel.
So we’re investing in that and we’re investing in a way that we do it at a moderated pace. The fact that we have been recognized by Forrester, again, this quarter indicates that our investment in digital, which we think is a very important one is working for us right. So we’ve got that leadership in mobile and we do think mobile is highly relevant to banking going forward.
And the final comment I make is, we – when I talk about moderated investment we’re keeping an eye obviously to operating leverage. We’ve had nine quarters of positive operating leverage. This quarter would be positive, if not for being one day less than last year. And we think for the year, we’ll be positive for the entire year. So we’re investing. We’re just trying to do it at a moderated pace, as we convert our bank to be the modern convenient bank and a leader in client experience.
Thank you. The following question is from Mr. Sumit Malhotra of Scotia Capital. Please go ahead.
Thank you. Good morning. Wanted to start with, Kevin Glass. First off, just on private, I’m not sure if you mentioned this. Is this going to be its own segment going forward? Is it going to be a U.S. banking segment, or are you putting it in wealth?
No, I intended to set up a separate segments that would include PrivateBank, as well as real estate finance and the U.S. wealth businesses that we have, so Atlantic Trust would be included in that and any other wealth business that we do it on this, so that’s our intent from a segment reporting point of view, Sumit.
Okay. So that’s just for my clarification. Now the actual question, on the capital level of the bank, so you’ve been mentioning consistently, I think, since you announced a deal that you intend to be about 10% on closing. Your capital build the last few quarters, including this one is such that by my math, you’d be better than that. You’d be closer to 10.5, just before I go any further, is that reasonable, or is there maybe some other pieces I’m not taking into account?
I think, you’re right that our guidance has been to be about 10%. I wouldn’t go to the decimal point at this point, Sumit. But certainly, we anticipate being also 10% when we close – so when we close the transaction.
The reason I asked is in lot of these acquisitions upon close, there can be a mark of the credit portfolio that’s taken place, which by my understanding has a short-term impact on capital, but does give you the ability to have perhaps a lower level of loan losses initially. Is that something you’re contemplating at this time taking a market against a credit book upon close?
Well, in terms of credit mark, that would simply be part of the purchase price equation and it will wash out. So, when we give our guidance, we’ve taken all of that into account, including the fair value market we may that we anticipate potentially taking on the transaction.
So the – I’ll leave it here that the level of loan loss provisioning we’ve seen from private in the near-term, which is looking at the numbers, has been averaging around 20 basis points or slightly below. It’s your view that when we see this bank on your balance sheet beginning next quarter, the run rate in provisioning initially shouldn’t be too different than what they’ve been doing as a standalone?
Yes, I mean, I think, that’s correct. They run a very effective business. We would look at their practices, but I think that’s a fair assumption.
All right. Thank you for your time.
Thank you. The following question is from Gabriel Dechaine of NBF. Please go ahead.
Good morning, everyone. First one on, I guess, I’ll follow-up on the branch thing. The closures – they’re not closures, they’re transformation. I guess, I’m wondering why you wouldn’t take a more aggressive stance on your branch network overall? I look at your bank versus some of the others. Your branch network is the third largest in Canada, single-digit percentage smaller than the next biggest one or the big – second biggest one, sorry, but your asset base is quite a bit smaller. So your – I guess, your productivity for branch, if you want to look at it that way, it doesn’t look as favorable. That to me presents a big opportunity for efficiency improvement in the future. What’s the outlook there?
Hi, Gabriel, it’s David speaking. So, yes, there, I guess, a couple of comments come to mind. Our focus is on meeting client needs, growth, and obviously, the cost associated with that. So I think that would be point one. So I wouldn’t want to retreat too much from a channel that would be relevant in the future. It’s certainly, important to recognize the nature of that channel would be different. Hence, the focus on converting those to a format that works for our clients in the future.
I guess, one point of note for our bank is, we’re strong in the rural representation of branches and our banking centers in urban less so. So I know you’ve cited our total number of banking centers, there is some bifurcation there as far as urban versus rural. So we’ll be looking for that adjustment. So what you might see as continued investment in urban and a change in our rural footprint, especially as we were able to meet the needs of rural customers remotely, right.
We’ve introduced imperial service direct, where you can have an imperial service adviser remotely as opposed to in your banking center. You can now deposit checks remotely, you can move cash remotely. There’s a whole lot of things you can do remotely. So what you might see is less noise on the bottom line as far as banking centers and some change above the line as to the nature of those banking centers and where they are located.
Okay. And the other question I have, this is on the mortgage business. And a lot of people have difficulty, including myself sizing the alternative mortgage market in Canada subprime whatever you want to call it. And do you have an estimate in mind, but also, if I look at the breakdown of your mortgage in Slide 17 here, uninsured residential mortgage, it’s only 8% of your book that has a beacon score less than 650. But in absolute terms, it’s still about $8 Billion. Now how would you define those borrowers? How do you classify those? And why wouldn’t they look at that 8%, the $8 billion in mortgages and say, oh, they’re near-prime, or are there something along the not prime. Let’s have that discussion.
Hi, Gabriel, it’s Laura. So I’ll attempt to take that one. So I’m not going to focus on sort of how large the alternative mortgages are isn’t. But what I can tell you is, from a CIBC perspective, we only originate B20 compliant loans. And so, as you can appreciate as a typical, I’d say, in all of our credit businesses, there’s always credit migration sort of post origination and some exceptions.
And so when you look at that Slide share 8%. When we look at what we would consider to be if you will our portfolio of weaker clients and that’s how we really focus on this, because it’s important to look at sort of your weaker clients on the margin. We describe that and I believe it’s in our prepared remarks, as 1% of our uninsured portfolio.
If we take those clients that have a beacon score that is less than 650, but we add on to that where there’s a loan-to-value of greater than 75%, because that would be for us really the client segment that is more, if you will, at risk in the event of increased unemployment, or a serious drop in housing prices.
Okay. I don’t mean to pick on you, you’re the only bank that discloses this stuff. So it’s helpful and it begets the question, I guess. Then my last one is on the capital floor. We saw that pop up of this quarter. And just wondering how – did that factor into your guidance of a post PrivateBank foreclose of 10% or above? Do you have some plans in place to kind of address that issue, because it could alter your asset growth capacity, right?
Gabriel, it’s Kevin. So in terms of hitting the floor this quarter, it’s just a question of timing. The B14 is not risk sensitive. So as we’ve added assets, the floor is coming to play. Looking forward, what’s interesting is closing the PrivateBank deal actually takes a flow issue away. There – their assets, their credit assets on the standardized basis, the floor is also less than 100%, so deductions create a fair amount of room there.
So we don’t see – once we close the deal, we don’t see the floor being an issue until late 2018 into 2019.
Oh, so you’re kind of higher proportion of standardized part of the OEAs, not all benefit you in getting rid of that floor, right?
I mean, you could use the word benefit, but from a math point of view that’s correct, the floor won’t be an issue.
Yes. Okay. Thank you very much.
Thank you. The following question is from Steve Theriault of Eight Capital. Please go ahead.
Thanks very much. First, just a couple of quick follow-ups for David. Just going back to Aeroplan for a second, I was interested in your comments there. You said Aeroplan has been stable. Does that mean that your new core customers are almost entirely taking the Aventura card versus the Aerogold card, or I guess other cards versus the Aerogold card, or is that more just a statement that the mix stayed the same over time just interested in how you’re selling that?
Yes, hi, Steve. Yes, we – what we’re doing – we try to put forward to our clients is to their choice, and some are interested in cash back, some are interested in travel. And if travel, then which travel card are you most interested in. And for some period of time now, it’s – Aventura has been the choice relative to the aero card by a fair margin. So we certainly aren’t in anyway just I spoke to an earlier question, guiding clients. We’re just trying to offer them portfolio of choice, but to answer your question directly, as clients are predominantly picking the Aventura.
Yes. And when you say stable, the – like the balances are stable relative to when you sold half the book?
Yes, the balances have been pretty stable. Like I actually anticipated a higher degree of runoff, because we’re not actually marking up book as part of the agreements. We’re not in the market and can’t be in the market advertising that book. So I anticipated a higher degree of run off. It really has been quite stable. And the good news is, firstly, the Penguin and the Aventura card have been quite popular, and really shown quite remarkable growth.
Okay, that’s great. And the other one I had for you was, you had some deposit promotions going on in Q1. I think that also leaked into Q2. So has that now run its courses have been discontinued, and maybe you can refresh us on an outlook for the margin in the second-half, given that change, and I guess, in the context of the mortgage growth you’ve seen as well?
Right, yes. And that last point it really is the differentiator for us, I think, relative to our peer group. With our different level of mortgage growth, mortgages offer a good return on capital. They just have a lower NIM. So our mortgage book grows, that’s the primary driver in our NIM change.
I think, Kevin said in his comments, our NIMs in the mortgage business are stable. It’s really just the mix as that book grows relative to the other products. The promo, yes, that’s kind of an industry spring thing and that’s run its course for the time being. And then there’s some macro industry factor of just lower rates and the continued runoff of factors into lower rates. But for us, the bigger differentiator is the mix factor on mortgage growth.
And so the margin second-half?
Well, that takes us into what we would anticipate our relative mortgage growth to be relative to peer groups. And what we have talked about in the past is our relative difference is, we’ve been quite significantly expanding our distribution channels specifically, obviously, the mobile channel. Clients like to have the flexibility of meeting our sales force when, where and how they would like, and that channel has done particularly well [come from nascent] [ph] channel to outsize.
Now, this is the second quarter, I’ll make a statement that we’re happy with our staff complement in the mobile channel. So that means, two quarters of stable numbers. It also means two more quarters, where you’re going to have that year-over-year change still in the number of mobile advisors and the productivity gains that kind of go with the growth in that channel.
So I think two factors here. You’re still going to have a couple of quarters where you have the impact of a larger sales force. You also have the impact of less runoff in the first line book, right, which is also another factor that changes our relative mortgage growth. So then you take that to NIMs, to the extent that we’re likely to grow faster in our peer group and mortgages for a little while longer. We’ll still see some pressure on NIMs.
And so you’ve been growing faster for quite a while, I’m interested the products per customer more recently versus products per new customer on the mortgage front, I don’t know a year or two years ago, is it better, is it worse, or is it the same?
Yes, I appreciate, you asking few questions. It’s better. The sales force – and this is an important point. The sales – we talk about mortgages a lot and we should, but we’re picking up market share in unsecured lending, in unsecured retail lending. We’re picking up market share in business lending. We’re picking up market share in personal and GIC books, and so we’re picking up market share on both sides of the balance sheet.
And that speaks to your point, which is deeper relationships, sales force is focused on money coming in and taking care of investment needs as much as the demand for mortgage needs, that’s resulting in our product, the depth of relationships with clients expanding, which has all the knock on effects regarding attrition and the client satisfaction and so forth.
So, it’s – the trend line continues to be good as far as deputy relationships and attrition and client experience. All of that’s, because our teams are thinking about deeper relationships in both sides of the balance sheet. So it’s – the trends are good on that front.
Okay, thanks for that. And if I could sneak one more in for Steve Geist. You had well look like record positive operating leverage this quarter. So as we look ahead, should we expect that 70% efficiency ratio to be sustainable with the higher asset levels and they’re quite a bit higher in the quarter, or is there an element of unsustainability, your catch-up here, given the very strong asset growth, a bit of an outlook there would be helpful, maybe not even in terms of the efficiency ratio, because that can bump around, but in terms of the operating leverage looking ahead, given the big delta in assets this quarter?
Sure, good morning. Our operating leverage was particularly strong in Q2, was also very strong in Q1, driven by the very strong revenue growth and solid expense containment. We still expect operating leverage to be positive over the remainder of the year, probably not quite to the same extent it has been over the first-half. But we would expect solid revenue growth and I think the expenses will remain contained. All of that clearly, if the markets remain somewhat accommodating for a while, which was a big factor of our growth over the first-half.
Our mix has been coming down from that growth. We expect it will continue to come down. We’re focused on improving that driven by the business mix that we have in our overall portfolio and just the continued scale as we continue to grow overall. So I think, the trajectory is quite good, but we’re not going to see off the leverage consistently at the 6% measure that we had in Q2, but it will remain positive.
Okay. Thanks very much. I appreciate the time.
Thank you. The following question is from Doug Young of Desjardins Capital. Please go ahead.
Hi, good morning. Hopefully, this will be relatively quick. Kevin, just from a – on the corporate side looks like there was recoveries of about $12 million, I assume, that’s related to FirstCaribbean, hoping, just but you can give some color on that, or Laura, if you can give some color on that?
And then, Kevin, in your remarks you mentioned loss – the loss in corporate going forward, the run rate should come down. Do you have a sense of what that should be on a normalized basis, as we move into the tail end of this year and into next year what the corporate loss rate would be?
Sure. I mean, from a corporate perspective, I’d be looking for something around break-even would be where I’d be going on that. And perhaps for the FCIB, I could and it over to Laura.
Hi, Doug. As it relates to our loan losses this quarter, which we’re very good, most of it related to recoveries in our oil and gas portfolio. There was a bit in FCIB, but it was primarily the oil and gas portfolio.
Was that what went through on a corporate side?
In oil and gas, okay. Why wouldn’t – I can chat with you offline. But – and then, David, just Canadian P&C banking, but it’s just kind of putting together just from your comments, it sounds like you’re pretty confident that in the back-half of this year, you’ll be able to achieve positive operating leverage even taking into consideration the mix taking into consideration the investments that you’re making, is that a fair characterization, or is there additional investments that you perceive that may take you offside that positive operating leverage in the second-half? Thanks.
Hi, Doug, it’s a balance obviously, right, because there’s opportunities to meet client needs. There’s opportunities to grow our business. So I talked about investment and our sales team talk about investment in digital and omni-channel. So there’s a tremendous amount of opportunity to enhance our bank and our service to our clients. And then with that, we trade off, as I said earlier, just stay focused on our operating leverage. So we’ve – and this quarter, I think, we’ve seen pretty substantive expense growth across our peer banks as well.
So there’s investment going on, but there’s actually pretty substantive revenue growth too. And for us, we’re picking up market share pretty broadly, which means the engines, I guess, running well in a sense we’re investing, but we’re also seeing growth as a result of that investment.
We’ve had nine quarters of positive operating leverage, this is the first quarter not. So we’re managing probably closely to that level. I think, for the year, we’ll see us be a positive in operating leverage. It’s – in this quarter being one quarter’s only marginally negative. But I just wouldn’t want to imply the second-half will be kind of substantially different from the other rates we’ve been running the last little while.
Have you ever given, I mean, other banks will say 1% to 2% positive operating leverage is what they’re expecting. And I can’t recall, if you’ve ever thrown a number out there around guidance for positive operating leverage?
No, I’ve not really have spoken to what we’re expecting for the year coming type of thing, positive, negative. I think the key factor that we’ve been focused on as a bank is being leading in client experience and leading in growth getting our banks to place or meeting client needs across the country. But doing in a cost sensible way and we refer to as mix of 55 as a level we’d like to get to. And I think, Kevin have spoken the fact that we’re tracking to that level.
Great. Thank you.
Thank you, Doug
Thank you. The following question is from Sohrab Movahedi of BMO Capital Markets. Please go ahead.
Hey, thank you. First, Victor, congratulations on getting the private deal done.
Thank you, Sohrab.
Laura, you on Page 16 of the presentation, say, you had a $11 billion of originations in Q2 2017. How many individual adjudication decisions would that have entailed?
Well, Sohrab, thanks for the question. I don’t have that number off the top of my head, suffice to say, many. You do have to understand, because I know if you’re trying to do the calculation, we do have part of our portfolio that is auto adjudicated. So it’s an algorithm and systems making decisions. And then, we do have another part of the portfolio, where it is manual adjudication taking place. So it does make your calculation a little more difficult to do.
Do you know how – can you tell us how much of that decisioning would have been automatic versus manual?
Yes, I think, we’re somewhere around the 20% range would be what is automatically done. Again, from a number perspective, it would, I mean, it would move around. But I’m guessing and I can reconfirm after, but we’re somewhere in that $30,000 to $40,000 range in terms of number of applicants that we’re looking at.
Sorry, 30,000 to 40,000 applicants you’re looking at in the quarter?
Okay. And so that would be the – and what would be – that would be something you’re looking at and what would be the approval rate, like if you look at 35,000, 40,000, you would be approving three out of four type of thing?
Our approval rates and we do follow them, I can assure you, they have not changed much on a quarter-over-quarter basis, as we look at them. And they range in that, call it, 65% to 70% range.
Excellent. Okay, thank you. And I just wanted to confirm, you don’t think you’re going to have to add to the collective when you bring PrivateBancorp on? Is that what you said?
I believe that’s what Kevin said. Kevin, did you want to add anything?
Okay. And then just one last one for Steve Geist. Steve, mutual fund balances were up, but the mutual fund revenues were not. Is there a story to that?
No, mutual fund revenues are contained in the asset management line, which as Kevin noted was up about 16% year-over-year, fairly consistent with the volume growth. And the mutual fund business has been up quite significantly and sales are up more than a 100% year-over-year.
Okay. So maybe I’ll just follow that what up in detail to understand how that works. Thank you.
Thank you. The following question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Hi, thank you. Good morning. I noticed in your shareholders report that the Canada Revenue Agency has come back to you for more taxes from the tax year of 2012, $180 million now for the dividend rental, that’s two years running. And my first question on this is, was there anything special or different about the way you booked those dividend rentals in 2011 and 2012 versus 2013 to 2016? And the reason why I ask is, I don’t understand why the CRA would stop there. I mean, it seems to me like that they would continue to come after you for every subsequent year for more tax bills?
So, Darko, it’s Kevin. So there’s nothing substantially different. And I think it’s just a question of which year they’ve actually audited. So we can’t speak for the CRA, but the two years that they’ve reassessed to be near that they have actually audited. What I would say is that, when we look at this, they’ve reassessed this as a dividend rental agreements.
But since the equity agreement – arrangements rules we introduced in the 2015 budget, and actually represent a modification to the dividend rental arrangement rules. And our filing position with respect to those dividend rental arrangements haven’t changed, since since the introduction of the rules. And so, we don’t think it’s appropriate for the CRA to apply new legislation retroactively deprive taxation years. We confront in our position and we’ll defend it vigorously.
Yes, the reason why I mentioned it Kevin is that, in your particular case, you’re also potentially on the hook for another $820 million of taxes with respect to the Enron, which I think next year is when that trial commences. So, I mean, your tax bill already potentially could be over a $1 billion. And then, of course, the CRA could come after you for another 4.5 years of taxes on the dividend rental.
And I guess where I’m going with this is, you have nothing accrued in the balance sheet for it. So is the answer that you should carry more capital just in case, because the existing potential of the Enron plus these two is already 65 basis points of capital, and your ratio will drop to 10% after PrivateBancorp, or thereabouts, is that how I – I mean, how does the regulator think of this?
I think you need to look at it in terms of our position on these particular tax issues, so and the two are completely different items. So, on Enron, we do have a proportion of that reserved. But again, we’ve been down this path a long way, and again, we’re very confident in our position on that, and we feel we’ve reserved conservatively frankly. And to simply set aside additional capital simply because the CRA happens to come in and we believe in appropriately assesses and I would say that strongly. It seems I mean, just sitting inside capital just because that is the wrong – we feel would be the wrong thing to do.
We’re very comfortable in our position. The fact that they’ve coming off to something where they’ve introduced new legislation, lends additional way to our position. So setting aside additional capital at this point would not be appropriate.
Okay. Thanks for the color.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Victor.
Thanks, operator, and thanks, everyone. Nobody ever wishes a bank happy birthday, so it’s our birthday this year. It’s the country’s birthday. I thought I just share a few remarks before we wrap up the call that we as CIBC here share a very proud longstanding history with our country, traces back to 1867, the year of our country’s confederation. We’ve had the privilege of helping clients, helping communities and businesses prosper and grow for 150 years. And I hope all of you will join us in celebrating our sesquicentennial Canada Day celebrations we planned across our great nation. Some of you should also probably go into our modern branches and maybe see what they’re like.
CIBC will be involved in 20 Canada Day celebrations coast to coast to coast, at least, one in each province and territory, and that’s going to help create a ripple effect of pride and excitement for both our teams and our communities and our clients. As a proud Canadian company, we’ve contributed to building our nation into one of the best in the world. We’re committed to ensuring our communities continue to be a great place to live and work for the next 150 years.
To continue our investment in Toronto, as Canada’s financial capital, I think, you all know that, we recently announced, it will anchor the – will be an anchor tenant in a new world-class urban campus that will serve as our new headquarters and home for approximately 15,000 of our bank employees in the Greater Toronto Area. Over the course of the development, this development itself will create more than 4,000 construction-related jobs in the Greater Toronto Area.
This urban campus development will be modern, will be tech enabled, going to foster collaboration, it’s going to help us attract the best and retain the best talent. We’re building a modern innovative bank that puts our clients at the center of everything we do, and we’re very excited to bring that to life for our own team, not only with our new headquarters, but everything that we’re doing and investing in CIBC.
In closing, I want to thank our team for another strong quarter and everything that they do for our clients and also want to thank our shareholders and our – and the analyst community for a continuous – for your continued support. Have a great day.
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